Sunrise saga underlines broader problems in the EU’s #telecoms sector

| September 13, 2019

The escalating dispute between a Swiss telecommunications firm and its leading shareholder might seem like a domestic matter, without many knock-on effects for the European bloc. But the storm brewing between Sunrise, Switzerland’s second most prominent telecom operator, and German shareholder Freenet— which is trying to block Sunrise from acquiring cable firm UPC—is a bellwether for the challenges facing European telcos as they make the transition to 5G. 

Sunrise’s primary motivation in buying UPC is to create an effective counterweight to rival Swisscom. The Swiss government officially stripped Swisscom, in which it still holds a 51% stake, of its last monopoly in 2007. The former market leader still commands a market share of over 60% in both mobile connections and broadband, however, and has been fined a number of times in recent years for abusing its dominant position.

Sunrise is hoping to close the UPC deal by the end of November, allowing it to compete on more equal terms with Swisscom.  The plan, however, has run into stiff opposition from Freenet—Sunrise’s largest shareholder controlling 24.5% of its shares. This week, the dispute over whether to go ahead with the UPC purchase reached new heights as an unidentified Sunrise shareholder called for the removal of Chairman Peter Kurer and board member Jesper Ovesen. Speculation immediately ran rampant that Freenet was behind the request. The German firm has denied any involvement, but Freenet CEO Christoph Vilanek commented that his company would have to consider how to vote if a referendum on Kurer’s chairmanship occurred at the next shareholders’ meeting.


Short-term considerations vs. looking ahead to 5G

The calls for Kurer’s ouster are sure to inflame the tensions which are already running high between Sunrise and its shareholders. The Swiss telco has criticized Freenet’s opposition to the UPC deal as being “guided by its own short-term financial constraints and self-serving objectives”. More seriously, Sunrise alleged that its German shareholder had proposed an “inappropriate and illegal” compromise: that either Sunrise or UPC buy back some of its shares at a premium in exchange for Freenet dropping its opposition to the acquisition.

Freenet is so heavily indebted that last year, Deutsche Bank identified it as one of eleven firms “with significant debt refinancing risks over the next few years”. It’s not surprising, then, that the German company would be on the lookout for any way to shore up its financial situation in the short-term.

Sunrise, on the other hand, is—according to analysts at investment bank Jefferies—managing to hold on to profit margins despite a tightening market, allowing it to take a more long-term perspective. UPC’s solid performance over the past few months suggests that annual synergies from the deal are now expected to reach 280 million francs, 45 million more than had previously hoped for.

These savings are particularly valuable as the battle to roll out 5G networks is heating up. Swisscom is set to extend its 5G network to the whole of the country by the end of the year, while Sunrise has apparently hit the 80% coverage mark in 262 cities and villages across the country. The rivalry between the two companies has put Switzerland at the forefront of 5G deployment in Europe—competition which is sure to heat up if the UPC purchase is eventually approved.


Tight spot for the telecom industry

This race to 5G is imposing heavy costs on the telecom operators jostling for position, however; it’s not surprising that Sunrise is jumping at any chance to cut costs and bolster its competitive stance. Throughout the EU, telecom companies are struggling to reconcile the tremendous opportunities 5G may offer them—not least the chance to recover from the rollercoaster ride their stocks have been on following a decade-long price war over 4G data—with the equally tremendous costs they’re facing to upgrade their infrastructure to 5G.

As the head of one telecom financing firm explained, “Rolling out 5G is a communications revolution that will profoundly change every aspect of our lives. But before the world is 5G connected, many challenges must be overcome, not least securing the trillions of dollars of required investment”. In Europe, the bill for covering the continent with 5G may stretch to €500 billion. This outlay would be difficult for any region to shoulder, but Europe is increasingly falling behind the US and Asia in making the necessary investments.


Why is Europe losing ground on 5G?

There are a couple reasons why Europe is lagging behind. Some countries, like the UK and Italy, are reconsidering whether to include Huawei in their 5G plans—second thoughts which threaten to set the rollout of the next-generation mobile network back in those countries. European operators are also having trouble getting their hands on affordable spectrum—most EU countries have yet to free up the spectrum bands needed for full-fledged 5G.

The most serious issue, however, may be the regulatory regime which oversees the telecom industry in the European bloc. Rajeev Suri, the CEO of Finnish electronics giant Nokia, argued that the EU is overregulating the sector, and that the ensuing lack of consolidation is causing Europe to fall behind in developing 5G networks.

Despite having a population only slightly greater than that of the United States, the European Union has a staggering 450 telecom companies—in the US, only four network operators cover the entire country. This has sent European mobile data to rock-bottom prices, but fragilized the balance sheets of companies in the sector, leaving them in a weak position to compete on a global scale and adopt the latest technology. Europe’s telecom executives have insisted for years that this stunning level of market fragmentation is “unsustainable in a 5G world” and that consolidation is the only way for Europe to claw back ground it’s lost to the US and China.

It’s a long-term strategy which Sunrise clearly believes in, given how strenuously it’s fighting to ensure the UPC deal goes through. Whether it’s able to impress the same vision on its shareholders remains to be seen. What’s certain, however, is that telecom firms in the EU will be closely watching the outcome of the Sunrise saga. If Sunrise is facing such stiff headwinds in its efforts to boost its competitivity through consolidation, how will firms bound by the EU’s notoriously anti-consolidation regulatory regime fare?




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Category: A Frontpage, Switzerland, Telecoms

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