This report does not constitute a rating action.

Our Rating Outlooks On U.K. Telecom Operators Are Generally Stable

Even though our long-term ratings on U.K. telecommunications companies (telcos) differ due to idiosyncratic reasons, all outlooks are stable (see table 1). The stable outlooks reflect our expectation that fixed and mobile service telecom operators in the U.K. will continue to benefit from low single-digit earnings growth over the next few years. Earnings growth is mainly spurred by the mobile segment. They also mirror our view that rating headroom is sufficient to navigate a period of heavy capital expenditure (capex) and intensifying competition in the fixed services segment.

Table 1
U.K. telecom operators' credit profiles
Issuer	Long-term issuer credit rating	2025e leverage (x)	Business risk ranking	Comments
Vodafone Group PLC	BBB/Stable	2.8	Satisfactory	We believe Vodafone's business risk profile is the strongest of the four rated telecom operators. This mainly reflects its scale and geographic diversity, which are larger than those of other players that mainly operate in the U.K.
BT Group PLC	BBB/Stable	3.1	Satisfactory	BT's business risk profile reflects its market-leading presence in the fixed retail and wholesale market in the U.K., high quality network, strong spectrum position, and strong position in the mobile market.
VMED O2 UK Ltd.	B+/Stable	5.5	Satisfactory	VMED's business risk profile reflects its market-leading position in the U.K. mobile market and high-speed fixed broadband offerings. That said, VMO2's business is smaller than that of BT as its revenues are nearly half of BT's.
TalkTalk Telecom Group Limited	CCC+/Stable	11.1	N/A	The rating on TalkTalk mainly reflects uncertainties about the company's operational performance and its very high debt burden, which we believe makes its capital structure unsustainable.

Despite the recent increase in macroeconomic uncertainty, we continue to expect modest growth for telcos. While macroeconomic conditions remain volatile due to geopolitical tensions, our base case assumes telecom operators to generate steady revenue growth over the next years. While fierce competition in the fixed services segment will remain, leading to broadly flat growth trajectory, mobile services will continue to benefit from moderate growth, which will spur topline growth for the operators, in our opinion.

Following the COVID-19 pandemic, inflation increased in late 2021 due to supply chain disruptions and rising demand. This led to cost-of-living issues in the U.K. as prices increased faster than wages, which reduced households' disposable incomes. Research by the Office of Communications (Ofcom) indicated that about one-third of households in the U.K. (about 8.5 million) struggled to pay for communications services in 2021. These affordability problems became more pronounced at the end of 2022.

The reduction in consumers' spending capacity resulted in customers downsizing discretionary fixed services, such as pay TV and fixed-voice services. This, along with continued promotions, led to a decline in fixed service revenues over the past few years. We believe pay TV and fixed services are on a structurally declining trend, whose pace accelerated because of cost-of-living issues.

That said, operators were able to pass on inflation-related price increases to customers, particularly on the mobile services. Many operators implemented inflation-linked pricing in their mobile phone contracts. What's more, the contracts of more than 50% of mobile customers were subject to inflation-linked price variation terms. As mid-contract price increases were contractually agreed, customers could not switch operators before their contracts expired.

This led to an appreciation in ARPU in the mobile services segment, without any material effects on customer churn. Overall, growth in mobile service revenues was offset by the decline in fixed service revenues over the past few years.

We anticipate that mobile service revenues will continue to increase, albeit at a slower pace, as operators moved to pound and pence pricing. That said, growth in fixed service revenues will remain challenging, even if customers switch to faster fiber broadband speeds. In theory, this should increase ARPU. However, a structural decline in fixed-voice and pay TV services will largely offset the marginal growth in the broadband segment.

This will result in mainly flat growth in fixed services, which still constitutes a recovery from the revenue decline over the past few years. We expect total revenues will increase by about 1% annually over the next few years, compared with our growth expectation of about 2% for telecom operators in the wider European market.

The downside risk to our base case is that intensifying competition in the fiber broadband market could exert downward pressure on ARPU, resulting in negative growth in fixed services.

Increase In Fiber Take-Up Will Likely Offset Headwinds

Sizable investments in fiber by large operators and altnets are intensifying competition in the fixed retail broadband market. Our base case assumes fixed-service revenues will stabilize after several years of decline. This is because the decrease in traditional fixed-voice and pay TV services will be offset by customers migrating to faster fiber-to-the-home (FTTH) broadband speeds. The intensifying competition in fiber broadband retail services and its potential effects on price increases remain a downside risk in our base case.

The U.K. is rolling out fiber networks faster than any other nation in Europe, thanks to supportive government initiatives. Among these initiatives is Project Gigabit, which was launched in March 2021. As per Ofcom's latest report from December 2024 on Connected Nations, FTTH coverage surged to 20.7 million (69% of coverage) at July 31, 2024, from 3 million (10% of coverage) in 2019. The government aims to reach a FTTH coverage of 85% by the end of 2025.

The increase in FTTH coverage resulted from significant investments by private carriers, with overall spending estimated to reach £30 billion by 2026. However, this rapid expansion led to overbuild and a slower take-up rate, resulting in significant losses for altnets. The FTTH take-up rate in the U.K. has not kept up with the fast increase in coverage. As of September 2023, the take-up rate was at about 30%, well below the 80.7% in Sweden and the 86.0% in Spain, according to the FTTH Council Europe's 2024 FTTH Market Panorama report.

Altnets' FTTH take-up rate is even lower at about 15%, well below Openreach's take-up rate above 35%. We expect fixed retail operators, particularly altnets, will aim to increase the take-up rate and penetration through offers, promotions, and additional schemes. Over the past few quarters, altnets have already shifted their focus away from fiber roll-outs to commercial activities.

We believe this shift resulted from the high interest burden, which has made fiber roll-outs economically challenging for smaller altnets. The number of promotional fiber offers, which mainly come from smaller altnets, has increased recently with some altnets offering high-speed broadband services at a heavy discount to average prices. That said, we recognize that the scale of altnets is relatively small and that their competitive pressures are concentrated within their limited footprint. Sizable broadband providers, such as Sky, Vodafone, VMO2, and BT, are not materially changing the prices for their higher-speed broadband services. As a result, they face moderate subscriber losses in this area as customers switch to cheaper offers from altnets. In our base case, we expect sizable broadband providers will largely hold their prices to maintain profitability and cash flows. This should increase ARPU as the fiber take-up rate increases.

That said, if larger operators use promotional offers and discounts to increase the fiber take-up rate, ARPU, and consequently fixed service revenues, could decline.

Aggressive Fiber Roll-Out Intensifies Competition In The Fixed Wholesale Market

BT's Openreach, which dominates the market, provided more than half of U.K. households (about 17 million premises) with access to fiber networks as of end of 2024. The company aims to reach 25 million homes by the end of 2026. In contrast, altnets will provide fiber access to about 8 million homes over the same period.

On top of this, VMO2 aims to upgrade its hybrid fiber-coaxial (HFC) network of over 16 million homes to fiber over the next few years. Considering that there are about 30 million homes in the U.K., these investments would mean a sizable portion of the country--particularly in moderately to heavily populated regions--will be covered by at least two fiber networks. This will lead to a significant fiber overbuild.

In terms of fixed wholesale market shares, Openreach remains a dominant market leader. VMED O2's network accounts for 20% market share, while altnets have a combined market share of less than 10%, which reflects their low take-up rate. That said, some altnets, notably CityFibre, have increased their fixed wholesale market share as they included large internet service providers (ISPs)--such as TalkTalk, Vodafone, and Sky--in their network.

Unregulated providers are utilizing aggressive prices to win market share. For instance, CityFibre, which is unregulated and whose full-fiber network reaches almost 4 million homes, pursues an aggressive pricing strategy on its wholesale proposition. Altnets, which are also unregulated, do not have to adhere to a limit when cutting prices for their wholesale offering.

In contrast, BT has largely held its prices by accepting some line losses on its DSL network, which it compensates for by selling the higher-priced fiber lines access. If VMO2--another unregulated entity and, as such, not bound to price cut limits--realizes its plans to enter the fixed wholesale market, competition will intensify further.

We forecast fixed service line losses for Openreach to continue over the next few years due to intensifying competition. That said, the company will remain the market leader in the fixed services segment. Openreach's revenues continue to increase as it continues to spur the take-up rate in higher-priced fiber network access. Additionally, altnets are too small to pose a serious threat to Openreach's nation-wide fiber coverage and significantly larger network.

If VMO2 were to enter the fixed wholesale market, it could become a serious competitor to Openreach, especially due to its sizable network footprint. This will remain a concern for Openreach over the next few years.

On the other hand, ISPs, such as Vodafone and Sky, should benefit from intensifying competition on fixed wholesale pricing and marginally improve their profitability if retail pricing does not erode.

Consolidation in the U.K. fixed wholesale market could increase. The funding to altnets has reduced significantly due to high borrowing costs and low investment returns. Further, most altnets have greenfield investments, meaning the cost to connect a premise to a fiber network is significantly higher than that of Openreach and VMO2, which mainly have brownfield investments.

The consolidation of wholesale altnets could create a scaled operator that is better suited for the current competitive environment. Recent consolidations included CityFiber's acquisition of Connexin in March 2025, the mergers of FullFibre and Zzoomm (completed in March 2025), Netomnia and Brsk (announced in June 2024), and CityFibre's acquisition of Lit Fibre in May 2024.

Larger players, such as VMED, could play an important role in the consolidation of fiber networks, However, the only evidence that supports this assumption is VMED's acquisition of the small altnet Upp, which covers about 175,000 FTTH premises, in September 2023. We believe acquisition targets would depend on multiple strategic factors, including price, scale, technology, and compatibility with existing networks.

Tides In The U.K. Mobile Network Market Are Changing

Despite intense competition in a mature market, mobile network providers recorded robust growth rates. Mobile penetration in the U.K. exceeds 100%. Growth in mobile subscriptions mainly results from machine-to-machine (M2M) connections and modestly increasing smart phone penetration. The increase in the number of M2M contracts benefits from the internet of things and is expected to increase steadily, albeit coupled with lower ARPU.

That said, mobile ARPUs have improved consistently over the past two years due to inflation-linked pricing. Additionally, the average monthly data volume per customer in the U.K. exceeded 15 gigabytes (GB) in 2023. Yet we see limited upside to carriers' more-for-more strategy, given high competition and the shift toward unlimited data bundles.

The mobile segment remains highly competitive. Major mobile network operators (MNOs)--such as BT, Vodafone, VMO2, and Three U.K.--compete to retain customers, while several mobile virtual network operators (MVNOs) add incremental competition in the market. We therefore do not expect mergers to increase ARPU materially over the near term. That said, the prospect of moving from four to three MNOs will reduce the risk of intensifying competition and make the competitive landscape more stable and predictable.

The U.K. mobile retail segment has proved its resilience amid rising prices. Mobile connections with access to 4G or 5G services increased to 97.6% in 2024, from 96.8% in 2022, reflecting the rapid advancement of network technology. Concurrently, average monthly data usage increased by 5 GB to 15 GB, which constitutes an increase of more than 40% year over year.

This uptick in mobile connections happened despite a significant rise in inflation-linked mobile prices: BT and Vodafone raised their prices by 14.4% each, while VMO2's prices rose 17% in 2023 (see tables 2 and 3). Nonetheless, customer churn remained unchanged. This translated into mid-single-digit service revenue growth for U.K. MNOs over 2022-2023, even though the macroeconomic environment was marked by slow GDP growth.

Table 2
BT's annual price hikes over 2021-2024
Issuer	2021	2022	2023	2024
BT Group PLC	+4.5%	+9.3%	+14.4%	+6.4%*
A price hike of 6.4% applies to products bought before April 1, 2024. Sources: BT, S&P Global Ratings.

Table 3
Consumer price rise policies among major rated U.K. telcos
Issuer	2023	2024
	Metrics	Price hike	Metrics	Price hike
VMED O2	RPI (January) +3.9%	17.30%	RPI (January) +3.9%	8.80%
BTEEThree UK	CPI (January) +3.9%	14.40%	CPI (January) +2.5%	6.40%
Vofadone UK	CPI (January) +3.9%	14.40%	CPI (January) +2.5%	6.40%
CPI--Consumer price index. RPI--Retail price index. Sources: Company sources, S&P Global Ratings.

Price increases have prompted the introduction of the pound and pence model, which we expect to be broadly neutral for MNOs' mobile earnings. To improve the transparency of pricing models, Ofcom introduced the pound and pence model, which came into effect in January 2025. The model is expected to mitigate some of the negative effects of unpredictable price hikes for consumers, which could affect overall revenue growth opportunities for telcos.

We forecast that the new pricing model will reduce mobile service revenue growth. This is because the increase in fixed prices will be lower in absolute terms than the rise in inflation-linked prices over 2022-2023. For instance, VMED's price increase in the mobile services segment in 2023 was 17.3%, while BT and Vodafone increased their prices by 14.4%.

We estimate that the pound and pence model will result in a price increase of about 6% on average for MNOs. As a result, we forecast that MNOs' revenue growth beyond 2024 will be lower than over 2022-2023 when it benefited from consumer price inflation-linked price hikes.

Even so, the decline in inflationary pressures and decreasing energy costs will support MNOs' profitability. This ensures that the net effect of the pound and pence model on EBITDA remains largely neutral.

Consolidation in the mobile market could stabilize competition. The merger between Three U.K. (49%) and Vodafone (51%)--which received the green light from the U.K. regulator, the Competition and Markets Authority (CMA), in December 2024--will create the largest mobile operator in the U.K., with a market share of about 35%. The consolidated entity will possess 59% of the C-band spectrum, which will lead to significant asymmetry.

Vodafone's spectrum deal with VMO2 should help balance the scale. While we do not know the details of the agreement, we understand that it should increase O2's share of the spectrum market to a level that is close to the company's share of the subscriber market.

The Vodafone UK/Three U.K. merger could spell opportunity for the wider sector. We view the lack of structural remedies as positive and note that remedies are broadly behavioral. This should prevent material market disruptions. However, the CMA recognized that short-term protection measures are necessary to ensure consumers and MVNOs do not suffer from merger-related impairments. The joint venture must:

• Deliver on the joint network plan, which entails investments of £11 billion over the next eight years;
• Retain existing mobile tariffs and data plans for at least three years;
• Adhere to pre-agreed prices and contract terms.

If these measures are fully implemented, we believe they could strengthen Vodafone's competitive standing in the U.K. and alleviate competitive pressures in the U.K. mobile market. We note, however, that it will take several years to achieve operational efficiencies and planned synergies.

Evolving Market Conditions Will Leave Ratings Largely Unaffected

VMED O2 is positioned well within its rating thresholds. We expect it can absorb the effects of increased competition in the fixed retail segment, not least due to potential increases in mobile revenues. We believe the current 'B+' rating is unlikely to be significantly affected by evolving dynamics in the fixed and mobile market. This is due to VMED O2's strong market position and brand in the mobile segment, and its sizable network, which reaches 16.5 million homes and will be extended further through nexfibre's network.

While we anticipate that competitive pressure may lead to HFC subscriber losses in the HFC network, this effect will be mitigated by ongoing growth in mobile services and an increasing subscriber base in nexfibre's footprint. The expansion of mobile services will result from contractual price increases, stabilizing competition in the mobile segment, and a network purchase agreement with the Vodafone/Three U.K. joint venture that should improve O2's network quality.

We do not anticipate that the shift to the pounds and pence model will distort VMED'2 earnings growth. The possibility of separating the fixed network segment and generating fixed wholesale revenues would present another potential revenue stream. Yet we do not consider this in our base case due to the associated high degree of uncertainty.

Vodafone UK's merger with Three U.K. will enhance its position in the mobile market, while increased competition in the fixed wholesale market could improve its profitability. The merged company will become the leader in the U.K. mobile spectrum market, with one of the highest numbers of mobile subscribers. The joint venture's leadership position in the mobile market and its superior network quality will give it a competitive advantage.

Vodafone's fixed services rely on Openreach's and CityFibre's wholesale access. We foresee increased competition in the fixed wholesale market, resulting from the entry of altnets and, potentially, VMED. Vodafone would benefit from the resulting competitive wholesale pricing.

While we view Vodafone's operating performance and growth prospects in the U.K. as favorable, challenging operating conditions in Germany weigh on the company's operating performance. The 'BBB' rating on Vodafone benefits from the company's commitment to its financial policy, which aims to maintain company-defined leverage at about 2.25x-2.50x. This translates into S&P Global Ratings-adjusted leverage of about 2.7x-3.0x, which is within our 'BBB' rating thresholds.

The 'BBB' rating on BT is justified by its moderate leverage, its diversified revenue base, and leading market position in the U.K. Considering intensifying competition in the fixed services segment and normalizing growth in the mobile segment due to the pound and pence model, we expect flat revenue growth for BT over 2025-2026. It continues to benefit from robust performance in Openreach reflecting the rapid development of the network and the migration of customers to fiber to the premises (FTTP). Yet we expect Openreach's broadband customer losses to continue. This reflects competition from altnets, which aim to increase their take-up rate through aggressive pricing.

We note that BT has comfortable rating headroom. Additionally, after fiscal year 2027 (calendar year 2026) BT's FTTP roll-out should be largely complete and capex will materially decline, supporting improving credit metrics, especially free operating cash flow to debt, which supports the current rating.

Intensifying competition could impair the current 'CCC+' rating on TalkTalk. We believe TalkTalk could face increased pressure if competition at the lower end of the retail market escalates. The company relies heavily on this market, particularly in the fixed services segment, where revenue growth has suffered from competitive challenges.

TalkTalk's loss of market share in recent years, particularly in its consumer segment, and high costs--including those related to BT Openreach--have weakened the company's performance. They contributed to negative free cash flows, hindered its ability to reduce debt, and resulted in refinancing risk and multiple downgrades. We downgraded TalkTalk to 'D' due to a distressed debt restructuring, before upgrading it to 'CCC+' to reflect the new capital structure and business plan, which involves a cost-cutting program.

We consider that the current rating is volatile and contingent on favorable business, financial, and economic conditions. The continued intensification of retail competition in the U.K. could put further pressure on TalkTalk's business and liquidity, as reflected in the current distressed rating.

Related Research

• U.K.-Based TalkTalk Telecom Group Ltd. Upgraded To 'CCC+' From 'D' On Completed Debt Restructuring; Outlook Stable, Dec. 19, 2024
• Vodafone Group PLC, Sept. 6, 2024
• BT Group PLC, Aug. 22, 2024
• VMED O2 UK Ltd., Aug. 9, 2024

Primary Contact:	Faiz Saiyed, London 44-7929-096054; faiz.saiyed@spglobal.com
Secondary Contact:	Mark Habib, Paris 33-14-420-6736; mark.habib@spglobal.com
Research Assistant:	Pranshu Tonk, London ; pranshu.tonk@spglobal.com
Research Contributors:	Pooja Jhabak, CFA, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai ;
	Kajol S Valecha, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai ;
Additional Contact:	Osnat Jaeger, London 44-20-7176-7066; osnat.jaeger@spglobal.com