UK mobile operators Vodafone and O2 have begun exploring a potential sale of shares in Cornerstone, their joint network venture, to support a quicker rollout of next-generation 5G services.
Cornerstone is to play a bigger role in the deployment of new network infrastructure as each mobile operator tries to slash costs in a difficult market environment. In a joint statement, Vodafone and O2 also said they have started to look at "monetization options" for Cornerstone, pointing to a future sale of the business that could raise much-needed cash.
Wrestling with competitive challenges in Spain and Italy, Vodafone Group has already been forced to cut dividends. It has spent heavily on new 5G licenses in several European markets, and a takeover of cable assets owned by Liberty Global, which received regulatory approval last week, could add to the financial pressure.
Ratings agency Standard & Poor's recently downgraded its credit outlook on the UK-based operator, saying it expects Vodafone's adjusted leverage to increase to between 3.2 and 3.5 times earnings (before interest, tax, depreciation and amortization) following the acquisition.
Vodafone's net-debt-to-EBITDA ratio was about 2 in its last fiscal year and anything above 3 would put the operator outside its comfort zone.
Debt reduction remains a priority for O2 parent company Telefónica, which had €40.4 billion ($45.1 billion) in net financial debt when it last reported results in March. That figure puts the operator's net-debt-to-operating-income ratio (before depreciation and amortization) at more than 2.5.
Neither company expects a sales boom from the rollout of 5G services next year, with Vodafone guiding for "low single digit organic growth" (in percentage terms) in EBITDA this year. Its UK business reported a 5.8% year-on-year drop in service revenues in the January-to-March quarter, although Vodafone said revenues would have grown 0.1% minus the impact of handset financing charges. O2 managed growth of 1.6% in mobile service revenues over the same period.
"Telcos need to be wary and smarter with their network investment," said Paolo Pescatore, a telecom, media and tech analyst with PP Foresight, in emailed comments about today's announcement. "Bottom line, the business model for 5G is unproven so it will be extremely challenging for telcos to recoup the huge investment in the short to medium term."
The companies had already extended their network-sharing agreement to cover 5G technology at the start of the year and today published the final details of those arrangements. Besides sharing "passive" equipment through Cornerstone, the companies will pool "active" network elements at numerous joint network sites throughout the UK, they said in a statement.
Passive refers to the towers and other infrastructure that hosts the telecom equipment, while active means the actual connectivity kit, including the radio antennas.
However, the operators have shied away from active sharing in urban areas. In addition to London, they will use separate radio equipment, fiber "backhaul" connections and power supplies at 2,700 sites in 23 larger cities, accounting for about 16% of total mast sites across the UK.
Including London brings the total number of such "autonomous" sites to about 25% of the total, said the operators.
The move reflects concern that service quality could suffer on shared 5G infrastructure as the volume of mobile data traffic continues to rise. It will also allow the companies to continue differentiating their services on the basis of connectivity, and could check any regulatory concern about the impact of network-sharing agreements on the competitive environment.
Vodafone CEO Nick Jeffrey said the plans would aid a speedier 5G rollout and boost service quality. "Greater autonomy in major cities will allow us to accelerate deployment, and together with active network sharing, ensures that our customers will get super-fast 5G in even more places more quickly, using fewer masts," he said in a statement. "We can boost capacity where our customers need it most so they can take full advantage of our new unlimited plans."
The remarks were echoed by O2 boss Mark Evans, who said: "This agreement will enable us to roll-out 5G faster and more efficiently, benefiting customers while delivering value for our business. It also importantly allows us to utilize the spectrum we acquired in the last auction very effectively.”
Vodafone has been less resistant to active network sharing in other parts of Europe where conditions are even tougher. In Italy, where it is also slashing jobs, it has agreed to share active 5G equipment with incumbent operator Telecom Italia to overcome financial challenges.
In April, it extended a deal with Orange in Spain to share active network equipment, including 5G gear, in any city with a population of less than 175,000 people. The previous agreement had covered towns of between 1,000 and 25,000 people.
- Vodafone, O2 Hint at UK Towers Sale in 5G Update
- Vodafone, Telefónica End Network Sharing in London
- Telecom Italia Seeks Friends for 5G Revival
- Vodafone Gets Blessing for €18.4B Liberty Takeover
- Vodafone Spain to Cut up to 1,200 Jobs
— Iain Morris, International Editor, Light Reading