European telecommunications companies (telcos) have struggled for much of the last decade, due to prolonged pressure on revenues, heavy investment in fibre and 5G networks, and recurring periods of elevated competition. However, that pattern has started to change, with the sector re-rating in 2025 on a constructive mix of defensive characteristics and improving fundamentals, further boosted by renewed optimism for consolidation.
The rally has faded more recently, as investors have taken some profits in a risk-on environment. Nevertheless, the sector continues to be supported by improving fundamentals, easing capital expenditure (capex) and the potential for consolidation among operators.
Understanding recent telecom performance drivers
The European telecom sector’s outperformance in 2025 can be explained by two factors. First, fundamentals in the sector have begun to stabilise and improve, with higher pricing becoming more achievable in several markets, service revenue growth turning positive after a decade of decline, and free cash flow visibility improving as capital expenditure begins to come down. Second, hopes for merger and acquisition (M&A) activity in the sector have picked up, with consolidation back on the agenda in a handful of markets. Mergers have the potential to improve market structure and profitability if regulatory and execution risks can be overcome.
More recent sector performance has been mixed, however, as the risk-on environment has led investors to take some profits following the outperformance of the last couple of years. The SpaceX initial public offering has also driven a negative narrative around the risk to telecom operators from satellites. Overall, we would characterise the risk/reward outlook for the sector as balanced, increasing the importance that companies deliver on their pricing and capex normalisation plans.
Telecom sector set-up: Defensive characteristics supported by improving operating fundamentals
The core investment case for European telecoms is not dependent on a single catalyst. The opportunity reflects a combination of pricing discipline, a clearer capex step-down and incremental cost reduction, which are all increasingly pointing towards an improvement in the durability of cash generation across the sector.
Most notably, service revenue growth has turned positive after years of decline, with price increases driven by inflation and changes in market structure, as operator behaviour in several markets shifts towards “value over volume”, with a greater willingness to prioritise profitability over net additions.
Further fuelling the pricing debate is the fact that mobile pricing in Europe is much lower than in the US, on a comparable basis, with European Union providers making an average revenue per user (ARPU) of €16 vs. €45 for US operators (as shown in Exhibit 1). This revenue gap has supported the argument for European telcos to raise prices on a “more for more” basis in markets where the competitive environment allows.
Telecom pricing and competitive dynamics: Improving in several markets, mixed elsewhere
Competition has eased in several markets but the competitive landscape remains mixed across Europe as a whole. In parts of northern Europe, and in several core markets, pricing dynamics appear more constructive. In Norway, for example, operators such as Telenor are pushing additional security features for a premium price, while mobile pricing is rising in Sweden. The Netherlands also stands out as a more supportive market, with KPN implementing a 3% price rise for mobile and fixed-line services in the context of a rational three-player market structure and low customer churn assumptions.
Elsewhere, conditions are more mixed. The telecom market in France has improved after a period of heavy price promotions, but the durability of pricing and cost discipline remains important. In Finland, telecom operators are giving differing views on whether competition is abating. By contrast, competitive pressures are rising at the lower end of the market in Spain, while competition remains intense in Belgium. Competitive trends in Germany are also mixed, although rising fixed prices and improved execution at Deutsche Telekom are boosting the outlook.
Capex and free cash flow: Visibility improves as fibre build matures
The cash flow discussion in the telecoms sector is increasingly moving from “how much needs to be invested” to “how quickly capex can normalise without destabilising competitive dynamics.” Sector capex as a percentage of sales peaked in 2021, driven by investment in fibre and 5G networks. The expected step-down in capex is a central part of the improving free cash flow narrative, as the fibre-to-the-home (FTTH) build matures from 2026-27, lowering investment risk and improving visibility of cash generation (see Exhibit 2).
Several incumbents, including Orange, KPN and BT, are guiding to lower capex from 2026-27, once the FTTH rollout is complete, and those plans are viewed as credible. Vodafone, however, may not benefit from the FTTH theme to the same degree due to its higher exposure to cable.
Alongside capex, incremental cost reductions supported by artificial intelligence (AI) remains a meaningful contributor to free cash flow upside for labour-heavy incumbents. The practical opportunities for cost reduction are in automation and process digitalisation across customer care and network operations, including call centre bots and autonomous network failure identification.
Telecoms M&A: Probability-weighted upside, especially in France
While there is room for M&A in the European telecoms sector, consolidation is perhaps better framed as an option on top of an improving base case, rather than a sector-wide assumption. The credible pathways are concentrated in a small number of markets, and timing remains dependent on execution and regulation.
France remains the highest-focus market. Mobile market consolidation from four to three operators is seen as likely at the market level, but the complexity is high. Regulatory hurdles remain despite operator alignment and deals being announced. And timing risk is material, with regulatory approval potentially delaying completion to the second half of 2027. In Sweden, Germany and Italy, four-to-three consolidation is theoretically possible, but regulator preference for French consolidation will be an important driver.
Starlink risk: Valuation vs. operating risk
A potential threat to Europe’s telecom incumbents comes from SpaceX’s Starlink satellite internet service. Our analysis suggests that Starlink is a bigger risk currently for fixed broadband/cable than mobile, and mainly in rural areas in Europe (which account for less than 10% of the market), as high FTTH penetration in towns and lower prices provide a defence against satellite competition.
In the longer term, a fully scaled next generation satellite constellation (which is reliant on SpaceX’s Starship launch system becoming commercially operational) could represent a bigger risk to the sector. But in the near term Starlink may represent more of a valuation risk than an operating risk, particularly if Starlink were to lower prices.
Valuation and positioning: After the rally, stock selection will be important
European telecoms are transitioning from a period defined by revenue decline and investment intensity towards one where pricing traction, an easing capex cycle and incremental cost cutting efforts can support more reliable free cash flow. Consolidation in some markets provides a probability-weighted upside option, led by France and, to a lesser extent, Sweden, while other markets remain constrained by regulation or recent merger activity.
These factors have helped the European telecoms sector to deliver strong returns over the last couple of years. However, following the more mixed performance seen so far in 2026, valuations are now looking more balanced, with the sector trading at a discount to the market on some measures, but above the historical average on an enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) basis. Dividend yield spreads have also narrowed relative to the broader market.
Given current valuations, we believe delivery will likely drive returns more than multiple expansion alone. With the risk overhang from Starlink expected to clear in the medium term, we think a premium will be placed on market structure, capex delivery and effective execution.