The UK telecoms sector is currently facing significant financial and debt pressure, hitting major operators and altnets alike.
Most recently, BT agreed to buy TalkTalk’s consumer and wholesale businesses out of administration for around £400m, a deal that has drawn sharp criticism from Virgin Media, which called it a ”stitch-up masked as a rescue”.
Meanwhile, CityFibre is back to negotiating with the creditors on its £3.8bn debt stack one year after its last restructuring.
In this episode of Distressed Diaries, host and senior reporter Bianca Boorer and senior distressed debt analyst Denitsa Stoyanova speak with Michael Weyrich, head of EMEA transformation at FTI Consulting about why the UK telecoms sector is struggling, whether consolidation can fix some of these issues and how they can deal with their burgeoning debt stacks.
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Episode transcript:
This transcript was generated with AI assistance. Report any material inconsistencies or inaccuracies by emailing podcast@9fin.com.
Bianca Boorer
Scratching your head over the latest complicated restructuring? Wondering whether Europe will continue to follow aggressive US tactics? Well, tune in to Distressed Diaries, a podcast where we dig into companies that have taken a turn for the worst.
I'm Bianca Boorer, senior distressed reporter at 9fin. In this series, we will explore how companies have ended up becoming over-levered, and more importantly, how they plan to right-size their balance sheets.
So today I'm sitting down with Michael Weyrich, senior managing director and head of EMEA transformation at FTI Consulting, and Denitsa Stoyanova, one of 9fin's senior analysts in the distressed debt team, to talk about the struggles facing the UK telecom sector. Thank you both for joining me today.
So we previously looked at alternative internet providers on Distressed Diaries, but in this episode, we're taking a look at the bigger players who have been in the news recently. So we kicked off October with BT buying TalkTalk out of administration after a year-long sale process failed to find a viable new owner. Unfortunately, BT's offer only covered £160m of debt, which meant that over a billion of its remaining debt was written off, which I think is quite the haircut.
Virgin Media was very critical over the takeover, saying it has all the characteristics of a stitch-up masked as a rescue deal. More recently, we've also written about CityFibre, which is back at the negotiation table with its creditors over-optimizing its balance sheet to suit its acquisition strategy.
Michael, I'm going to come to you given your 30 years of experience in turning around businesses in the telco sector. I thought you'd be best placed to give us an overview of the struggles facing the industry. So can you give us a bit of an overview?
Telecoms face a pricing and investment squeeze
Michael Weyrich
Yeah, let me give it a try. So I think the broader telco sector is really faced with a number of broader challenges. First of all, the market is not really growing in the UK. There are a lot of markets globally where there is growth, but in the mature markets in Europe, there's flat growth.
From a pricing perspective, most services are under quite a lot of pressure. For instance, I saw a recent study that broadband prices have reduced by X number of percent every year, and mobile pricing is also under pressure. A market that is flat and where there's no growth in it obviously poses a number of commercial challenges on how companies will grow and how they will remain profitable.
At the same time, these players in this sector are faced with a lot of capex investment requirements, so constant infrastructure upgrades. We are all using our mobile phones more and more. We have more apps. We have 5G. We don't have 2G anymore. And all of it is very infrastructure hungry and requires a lot of bandwidth, etc. So the requirements and constant investments into this sector are huge. And hence, it's a bit of a perfect storm for some of these companies in the sector with a top line that's under pressure and investments that are constantly going up.
It's also a sector where there is a lot of consolidation going on. You just mentioned some of the deals that are in the pipeline and have been coming, and I think there will be more coming forward. There's still a lot of fiber infrastructure build out going on in the wider sector. Yeah, and I think the telcos are actually becoming more infrastructure landlords than maybe they were in the past, where you sort of see tower companies, fiber operators, and data centers probably being separated out and where a lot of the growth probably is in the enterprise side rather than the consumer side.
Virgin Media’s balance sheet meets shrinking growth
Bianca Boorer
Okay, I think that gives us a nice overview to dig into some of these more granular situations. Deni, given your analysis that you've done on Virgin Media, I think we should start by drilling down into that one, given we've had a lot of inbound interest on the name. Could you summarise some of the issues the company is facing?
Denitsa Stoyanova
Yeah, absolutely. So I think the fundamental issue VMED is facing is that it has a balance sheet built for growth, which is now facing a squeeze. So there are three aspects that I'd like to touch upon.
The first one is leverage. So the total debt is over £22bn. Of that, 75% is senior secured, 30% is vendor financing notes backed by receivables, and 5% is unsecured notes. The rest is leases. So as you can see, the structure is layered, and it is complex, and leverage is closer to 6x, whereas management wants to make it closer to 4x. So the problem is it's no longer clear how they're going to hit that target.
The second issue I see is P&L weakness. The operating business is not doing very well at all. We have topline declining for four years in a row. Last year, VMED lost over 120,000 customers.
And this year, it continues to lose broadband customers and that's because new fiber competitors are moving into the same neighborhood. So customers have now more choice. And usually there's a second or even a third network provider to pick from. So as a result, the EBITDA is guided to drop by 5% this year. So that is not good.
But the third issue, which is also quite, I think, important, is cash.
So VMED is upgrading its cable network to full fiber. And capex stood at 22% of revenues last year. However, the company is also burning free cash flow. Its idea and its hope is that they'll reverse that free cash flow burn. So it has provisionally guided £200m of free cash flow generation this year. However, the problem is that all that cash will be upstreamed to the shareholders, which is also guided. So then the question is, how is VMED going to deliver if the cash is not staying where it's needed?
And that is why I think the Netomnia deal matters very much here, because it offers £1bn ofcash receipts and it offers £800m of capex relief. So when the CMA earlier this month published a slightly unfavorable decision and they said that they're minded to block the deal, then the junior bonds really repriced, and they lost 20 points. And I think this gap really tells you what investors are thinking. They think that most of the losses will land in the junior layer. I think that there are quite a few issues, but these are the key ones to my mind.
What a Netomnia block would cost Virgin Media
Bianca Boorer
Okay, I think that's a good overview of Virgin's situation. I mentioned the TalkTalk deal earlier. Virgin has been very open in criticising this deal, saying it came just days after you mentioned the UK competition regulator found concerns over the merger with Netomnia and Nexfibre.
So for those who are not familiar, it's Virgin Media shareholders, Liberty Global and Telefonica, that are the ones looking to buy Netomnia through their joint venture, Nexfibre. So Virgin argued that that merger would create a sustainable challenger to BT's Openreach. So with TalkTalk now under its wing, Virgin feels that BT is further tightening its grip on the market. So Virgin has raised its concerns with the CMA and the CMA responded by opening an investigation into the BT transaction.
And as you mentioned, on the back of that, the potential blocking of the deal with Netomnia, Virgin's subordinated debt has tanked around 20 points. And we've written that bondholders have since hired Milbank amidst all this uncertainty. So I think you touched on this already a little bit, Deni, but I mean, what would be the impact if, let's say, the CMA was to go through and block the deal?
Denitsa Stoyanova
Well, I think the obvious hit will be on cash first, because under the deal, VMED would receive around £1bn of cash. And that is 5x the free cash flow it expects to generate this year. So that sounds, you know, material at first. But if you think about it, back of the envelope calculation show that it will only cut leverage by less than half a turn. So the risk of losing that cash cannot explain why the bonds have tacked by so much, which is basically the key worry currently with the credit.
So the second impact I see is on capex because Nexfibre is supposed to upgrade 2 million of VMED homes to fiber. And that means that VMED is not going to fund that spend. And management puts the value of that avoided capex at 800 million.
However, with the deal, capex would fall to mid-teens as a percentage of revenues, but without the deal, the burden will stay with VMED and most likely will stay elevated somewhere in the low 20s, mid-20s percentage, just like last year. To be fair, I think CMA have realized that, or they think that the upgrade will go ahead, whether the deal succeeds or not. But if the deal doesn't succeed, basically the outcome will be that VMED will be stranded with all the capex and without any of the cash.
And I think probably one thing that's worth pointing out is the impact of competition as well, because the CMA is painting an alternative scenario where CityFibre and Netomnia can merge. And this could create a third independent wholesale network to compete with Openreach and with VMED. The problem is, however, that VMED charges a fixed fee across its network. So if there is high competition in one part of the network, that brings the price and profitability down across the entire network. And this will be at a time where its average revenue per customer is already falling.
And one thing one might want to also consider is credibility. For example, Liberty Global and Telefonica are sitting on both sides of the deal. So if the deal falls apart, one can ask, will the sponsor inject money to fix VMED? And also, are the bondholders and the shareholders' interests aligned, or do they diverge? So that's another consideration.
Regulators weigh consolidation against competition
Bianca Boorer
Interesting. A lot of game theory there. See, we've spoken a bit about how there's obviously a lot of consolidation in the sector, and the regulators are inevitably part of that story. Michael, from your perspective, what role is the CMA playing in shaping that process?
Michael Weyrich
Yeah, I wouldn't describe the CMA as being for or against consolidation in principle. I think their role is to look at every single transaction and look at the merits of it. And then what they typically will have to do is to say there is a transaction in front of them. What's the realistic alternative? And then basically question whether the transaction will materially weaken the competition as a result of the transaction going through. That's really their job in general.
And I guess different deals can go in different directions. So, for instance, in fiber, if, say, you have two companies coming together and you can improve network utilization and you can actually make a more healthy company out of it, that could support investments. That, in principle, is a good thing.
However, if you have two other companies where they have completely overlapping networks and overlapping businesses, there is a real risk that maybe there will be a reduction in the independent wholesale options in the market. Back to the suggestion, the idea you just came up with there, and that could potentially weaken the competitive pressure. So that's really where they're coming from. And I think that's what the remedy is to look at.
And of course, there will be different opinions on — there will always be two sides of the story. The acquirer is going to paint a picture of competition remaining high, and their job is to question that and challenge that.
TalkTalk’s collapse tests the sector
Bianca Boorer
We'll see what happens in the end. So I wanted to talk a bit more about TalkTalk, pardon the pun. It's a name that we've been following since 2024 with three restructurings in the last two years. As I mentioned already, BT swooped in and got a heavy discount, meaning that most of the debt had to be written off. So, Deni, do you think this story is TalkTalk specific or do you think it's a symptom of something bigger going on in telecoms?
Denitsa Stoyanova
Well, I think that it's a symptom of both problems. But first, let's look at what's specific to TalkTalk. So the company is a low cost, price sensitive retailer, and it has no network of its own. So it also didn't have a very strong bundled offer to customers, which means that customers could live a little bit early.
And because it's a broker platform, a wholesale broker platform, it's not a true fiber infrastructure asset. And the key problem with that is that it could never earn the premium EBITDA multiple that other asset owners could earn. And because TalkTalk had around 10x leverage at a time where its problems kicked in, the wholesale platform needed an EBITDA multiple, at least in the high teens, in order to achieve solid, meaningful deleveraging.
And also the credit had history of supplier stress. It had payments disputes with Openreach. So all that drove it to its first restructuring.
But also, if you remember, TalkTalk was spending more money to win customers than it was actually earning from those customers before they left. So in practice, it couldn't grow out of its problems. And, you know, the churn was elevated; the revenue fell 10% last year. So we're not surprised that this is an accumulation of many credit problems. So this is very credit specific.
However, your other question is about whether there's sector-wide symptomatic problems. And I would say that all telcos are hit by the same problems, really. We're talking about intense price competition, easier switching under Ofcom rules. There is a race for the fiber build out. So around a third of premises now have at least two or three more fiber networks to choose from.
And worryingly, according to some surveys, over 70% of the fiber providers need to refinance their debt in the next year or two, which actually means that this is not just company specific problems. This becomes a sector maturity wall as a problem.
And the last point I'd like to make is that you can see by the failed attempts to sell TalkTalk how quickly the value can just disappear. So the sale price was basically cut in half to 300 million, and only then BT bought it out through a prepack. Over £1bn of debt is written off, only with a handful of creditors getting some recovery.
So you can see that VMED is not TalkTalk because I want to circle back to VMED. On the positive side, I would say that VMED owns its own network. It offers bundled services, which can mitigate some of the term problems. And also it has around 20% market share in fixed broadband.
But on the negative side, it faces the same squeeze in terms of pricing, tech, capex. And also it has a much bigger debt stack, which means that the potential for creditor losses is much bigger with VMED.
Bianca Boorer
Yeah, I think we've seen a lot of contagion in terms of the debts trading down across various other credits in the market. Like we've seen VodafoneZiggo fall around seven points on the back of the CMA's potential blocking of the deal. Michael, do you think it's important to distinguish between, you know, sort of the idiosyncratic company issues or the sector wide issues?
Michael Weyrich
There's obviously a couple of these sector wide issues that are common. But I think in the TalkTalk story, that was a lot of us company specific in that particular situation. So I think, you know, it's a market where connectivity remains essential. In a mature market like the UK, it's quite hard to differentiate a basic broadband proposition because it's a very competitive part of the market and the prices are under a hell of a lot of pressure. And as you just mentioned before,you know, customers can switch easily.
And the challenge I think many of the operators are facing is that the revenue per customer does not necessarily go up just because usage or speeds go up. So basically you have a constant need to invest, and at the same time you can't necessarily charge more for it, which obviously is a bad combination if you're in the operator's seat.
So I think when you take that backdrop, which is generic across the industry, and then you overlay the specifics on the situation you just talked about with a company that has a lot of debt, very high debt level, and actually has at the same time limited room to improve its commercial position, that's when the challenging situation comes in. And those pressures can become acute all of a sudden. So that's, I would say, one of the takeaways in my view.
So I think the outcome of the TalkTalk story, I don't think is one which is a template for the whole industry. It was very company specific. And that's probably where it ended up.
But it also does show that in a market where you have so much pressure on the top line (markets are flat; prices are under pressure), there is very little room for error in companies that have a lot of debt. So they need to be managed really tightly and carefully to be able to stay in business and be profitable.
Virgin Media’s options for tackling its debt
Bianca Boorer
Yeah. So obviously we know the outcome of the TalkTalk story, but we still don't know what Virgin Media are going to do. They've got the £2.7bn of debt maturing in 2029. Deni, what options do you think it has to address this majority wall? And do you think, you know, it could do maybe a liability management exercise like Altice?
Denitsa Stoyanova
Yeah, of course. So I think there is no immediate liquidity crunch. So VMED has time to sort itself out, but it's not unlimited time. We'll say 12 to 18 months. And I see four key options it could pursue.
One is obviously deliver on your deleveraging. That means it needs to bring in the £1bn from Nexfibre cash. They need to cut £600m of costs. They need to cut capex to the mid-teens. It needs to reverse its free cash flow burn.
The problem is the CMA has a preliminary decision, which is quite negative. And the sponsors at the same time are quite reluctant to offer remedies. So that makes deleveraging very hard. It is an option that's available, but it's not probably the most likely one to happen.
The second option I can see is, okay, you have 2029 maturities; well, go out and refinance them, right? That's what Liberty Global is hoping to do. On the recent call, it said that they're looking for opportunistic, you know, moves about its 2029 maturities.
However, if you look at the 2031 senior secured bonds, they trade in the mid-60s today, which is way below par. So the market doesn't seem to be wide open for a refi story. So I think the best bet here is for the sponsors to wait for the global macro backdrop to improve and for investor sentiment also to improve towards those kind of weaker telco companies.
The third option, which is on everybody's mind, is shareholder support. We have absolutely no insight on what's going on in the boardroom. What are the discussions there? Obviously, Liberty Global and Telefonica joined owners, and they have said that cutting debt is a priority for them.However, I would like to question: they continue to upstream cash. So to my mind, that doesn't sit comfortably with that goal of deleveraging. So something has to give there.
And to address the second part of your question, whether VMED can do an OT style LME, I think it can. So I can see a lot of high-level similarities there. They are in the same sector. They have the same large cap stack of over £20bn. They have a minimal layer of unsecured notes, which basically provides little cushioning to the senior secured creditors. And both companies have loose documents with large capacities to do stuff.
So, for example, VMED can extend maturities by distressed debt exchange, potentially non-prurata. It has ability to release asset security with a question mark there of whether the consent level has already been achieved. It can execute a dropdown. So, yeah, it can do all that and potentially more. However, there could be a caveat here that a large chunk of VMED's debt is governed by English law docs. And some of those LME transactions, for example, like the non-priorate exchanges, they're not robustly tested under English law. So there is uncertainty about what could litigation potentially bring.
But I think the wonky difference between the two companies I see is in ownership, because Altice a private company which is largely owned by a billionaire founder who is quite comfortable threatening creditors and issuing ultimatums, while VMED is owned by two publicly listed very large corporations who are accountable for a very wide shareholder base. And they also have diverse boards. And hopefully they'll have enough independent and level-headed executives who could potentially play a conciliatory role, or they can be the voice of reason there not to pursue avery, very aggressive tactics like OTs. But that's obviously our hope and probably the investors' hope.
I think what investors are doing preemptively in anticipation is to organize behind Milbank. And they're starting to explore some options because an LME could potentially be in their future.
Bianca Boorer
Yeah, I think Virgin's shareholders may not have the same appetite for litigation. So, Michael, I mean, we talked a bit about TalkTalk being, you know, its own situation, but do you think, do you have any predictions for similar situations to happen in the sector?
Michael Weyrich
So to answer your question, I think I wouldn't try to try and predict which companies will enter into a similar challenging environment as some of the ones we talked about here. But I think it's highly likely that the wave of consolidation and restructuring will continue, especially in the more leveraged part of the markets. I think we mentioned that the companies that are particularly challenged are those that are in the market, but also are facing a high debt burden and have a lot of refinancing requirements at the same time in the current environment. And those are probably in the perfect storm for additional challenges.
I think one thing to think about is just because a company potentially goes into administration does not necessarily mean it disappears. There will be a change of capital structure. There could be debt for equity deals. There could be new shareholder funding. There could be asset sales, or there could be selective mergers.
So just the mere fact that administrations are happening is not necessarily a bad thing for the market. It just means that the structure of the market changes. And obviously there will be new challenges in assessing whether those transactions should be allowed through or not from a sector perspective.
Telecoms need cash flow rather than growth at any price
Bianca Boorer
So I guess to wrap up, a question for you both. How do you think the telco sector in the UK can get out of this rut? Deni, do you want to go first?
Denitsa Stoyanova
Yeah, of course. I mean, I think there are several things that can be done, or at least they can pay closer attention to. The first thing I think it's leverage because it has too much returns. So the sector needs to re-evaluate how much leverage those companies can handle because a leverage of five or six or even 10 only works if your cash flows are very stable. And right now, a lot of companies just like VMED are facing lower average revenues, and they're facing falling a bit down.
Also, I think that a capex cycle has to turn. VMED has capex of 22% of revenues, and that's great during a build out phase. But the credit case can be made only throughout the cycle if capex starts falling towards the mid-teens and if the take-up of those networks is rising; those networks are not idle. And on average, old nets usually have around 80% take-up on premises compared to 30% of Openreach. So they're in a tough spot. They need to invest more, but they cannot really afford to. So that kind of dichotomy and that tension has to be addressed somehow.
And third, I think we need to see the right kind of consolidation because consolidation is happening. And last year, we've seen quite a lot of deals, and they'll continue this year. But as the CMA showed, I think the regulator will scrutinize those deals that remove an independent wholesale competitor. So a scale is not a cure for leverage, is the point here. A network with too much debt can still need restructuring, even if the fiber stays there and is in service.
And it's quite necessary, I think, in order to kind of patch up all these bloated cap stacks. You do need equity owners to put in money to shore up the balance sheet.
However, at the same time, we see the junior bonds in a lot of those cap stacks are tanking, and some of them are close to trading to 20 or 30 cents to the dollars. So convincing sponsors to put equity behind the junior debt trading at such low levels will be a really tough sell. And also the question is how many sponsors have meaningful amounts of cash lying around spare to inject in their ailing investments. So yeah, I think there is a lot that can be done, and it's all very difficult decisions to be made.
Michael Weyrich
Let me try and frame the challenge as I think the sector is facing a bit of a shift from maybe initially building coverage and adding customers to really generating sustainable returns from assets that are already in place as opposed to being built. And that means a number of different things around how well operations are being managed, how to improve network utilization, how to be more disciplined about where you invest and what to invest in, and probably be much more focused on sharing wholesale consolidation where those improve the economics of the business. So really be much more operationally focused on how to drive the operational performance.
There are obviously a ton of opportunities in 5G, in AI, in enterprise, no doubt about that. But I think the operators need to really show customers are willing to pay for these services and that the margins can justify the effort. Because otherwise, it doesn't really make financial sense to go that route.
And maybe what also would be included with that is to simplify the operations, streamline costs, and obviously, without a surprise, readdress any refinancing long before the maturity comes up. So I think the sector's answer is not really growth at any price, but it's growth that turns into profitability and cash flow. That would be the way I would summarize it.
Denitsa Stoyanova
You know, obviously, the things you're talking about, Michael, are very kind of mid to long-term fixes and challenges that need to be addressed. However, investors have more immediate milestones to look forward to.
For example, our most topical name at the moment, VMED, is going to release its results on the 3rd of November. We're also really looking forward to the CMA final decision on Netomnia, which is due by the 15th of December. And obviously, the review of the BT–TalkTalk deal also needs to happen in the very immediate future. So I think that there are lots of things that are going to keep us busy in the run up to Christmas.
Bianca Boorer
Yeah, and we'll be watching very closely here at 9fin. Thank you both so much for coming on today.
Michael Weyrich
Thanks for having us.
Denitsa Stoyanova
Thank you. It's been a pleasure.
Bianca Boorer
And thank you to our listeners. If you want to share feedback on this episode, please reach out to us at podcast@9fin.com, and we'll see you next time.