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Consolidation and Competition: Global M&A trends

May 06, 2016
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Innovations in technology have enabled higher processing and transmission speeds and created new uses for existing communication technologies, allowing service providers to address growing customer demands while expanding their business horizons. Competitive pressures are, however, squeezing profits and driving industry consolidation, as players pursue a variety of merger and acquisition (M&A) options.

According to research firm Mergermarket, global telecommunications, media and technology deals reached an all-time high in 2015, with 3,021 transactions valued at $768.3 billion taking place, a 46 per cent increase over the preceding year. Technology was the biggest subsector with 2,225 deals for $412.6 billion, an 88 per cent increase over the preceding year. The telecom subsector witnessed 196 deals for $259.3 billion, a 5.8 per cent increase from 2014 and a 2.1 per cent increase over the 2013 levels. According to Mergermarket, the US had the most and the biggest deals – 977 transactions worth $412.5 billion.

The key deals of 2015 include NJJ’s acquisition of Orange Switzerland for $2.9 billion in February 2015, VimpelCom’s sale of Djezzy to Algeria’s FNI for $2.64 billion, Altice’s acquisition of Portugal Telecom from Oi for $8.15 billion, Orange’s acquisition of Spain-based Jazztel for $3.75 billion, Zegona’s acquisition of Spain-based Telecable from Carlyle for $705 million and Tele Columbus’ acquisition of Germany-based PrimaCom for $783 million.

This shows that even though the number of telecom players is dwindling, industry consolidation between mobile and fixed line/cable operators is still robust, resulting in bigger players occupying more dominant positions.

Technology convergence is leading to a plethora of new types of deals. For example, innovations in mobile payments systems, data analytics, cybersecurity and cloud computing create the need for new intellectual property and talent that many companies can access quickly and easily through acquisitions. In addition, business models continue to converge, helping boost M&A activity, such as telecom businesses seeking vertical integration with media and technology.

There are several other factors driving deal activity in the telecom space. Consumers are increasingly expecting data and services to be delivered on demand to all of their devices seamlessly, and the industry is seeing a shift away from long-term contracts. Companies are changing gears to focus on mitigating churn and expanding service offerings. Despite high valuations and rocky public equity markets, low debt costs and significant cash reserves are ensuring that acquisitions remain a key lever to pursue growth.

Mergers help in reducing redundancies

Fuelling M&A activity among telecom firms is the desire to reduce or avoid redundancies. Often, two competing providers within a regional area may build proprietary infrastructure – cell towers, for instance - or pay separate leases for the existing infrastructure. Mergers can eliminate these redundant costs and consolidate the customer base of two otherwise competing companies.

Firms may also opt for acquisitions in order to add untapped competencies and non-core businesses that they had not previously participated in. They eye the vast opportunities of building scale in order to secure a superior return on investment.

Meanwhile, many are seeking to offer customers a one-stop shop, a quad-play service, that can take advantage of the bundling of a landline phone, broadband, TV and mobile services. Quad-play can help streamline and improve overall customer experience while reducing customer churn and thereby reducing new customer acquisition costs. This is very important given the now-saturated mobile phone market. The AT&T acquisition of DirecTV exemplifies this type of merger. Similarly, European telecom providers such as Iliad and Telefonica have secured millions of quad-play-bundled subscribers in the past two years.

Growth in NGN networks drives deal activity in the OFC space

Similar trends are playing out in the optic fibre cable (OFC) space. OFC providers are realising significant year-on-year gains as consumer demand for high speed connectivity continues to rise in tandem with the increased use of smartphones and wireless mobile devices. Customers are increasingly clamouring for high definition videos, video streaming, 4G and next-generation 5G capabilities, and faster premium speeds. As a result, OFC providers have become attractive acquisition targets. Deals that allow providers to enhance their infrastructure by tapping fibre optics experts are also becoming quite common.

Examples of such deals include Level 3’s purchase of TW telecom, which brought the firm additional metro fibre-based on-net buildings and instantly expanded its building footprint to nearly 21,000. Similarly, Allo Communications’ pure fibre optic service will increase Nelnet’s ability to meet customer connectivity demands. Nelnet acquired Allo in November 2015.

High competition makes customer retention challenging

Challenged by high customer churn rates and rising organic customer acquisition costs, operators are also utilising acquisitions to enter new customer markets. They seek to provide broader service packages that will increase customer satisfaction and keep existing customers from fleeing to their competitors.

Strategic acquisitions also allow operators to tap new markets in which they have little or no operating experience. Purchasing competitors that are well established in a particular geography gives the acquirer immediate access to that area. Prime targets typically feature premium customer satisfaction rates, which translates into less after-transaction churn. If customers are happy with their current services and price level, they are less likely to jump ship after the merger.

T-Mobile is a good example of a company that has adjusted its business to accommodate the demands of modern consumers. The third largest wireless network in the US has seen significant growth through its unconventional elimination of annual service contracts, and by allowing customers to upgrade their smartphone devices more often than do its competitors and at lower costs.

Outlook

Looking ahead, the telecom industry will continue to be propelled by major technological trends, including mobile broadband, M2M, cloud computing, over-the-top services and big data management. With interest rates remaining low in the US and Europe and banks willing to underwrite large debt offerings structured for acquisitions, market conditions are favourable for global M&A activity. The regulatory environment in most of the emerging markets has also been improving to favour greater consolidation.

According to a forecast by Baker & McKenzie, published in association with Oxford Economics, the markets that are predicted to grow the fastest in terms of overall M&As in the next five years are China, the Netherlands, Mexico, India, the UK, Germany, Indonesia, Saudi Arabia and the UAE. Given that many US and European companies have accumulated large cash balances available for acquiring new businesses and that the US and European markets have become almost completely saturated with smartphones, reaching close to 80 per cent penetration, telecom companies there can no longer rely primarily on new customers to drive growth. They will, therefore, have to look at expanding to newer markets.

Financial sponsors also have the potential to boost global transactions, with private equity firms sitting on a record $1.1 trillion in uninvested capital. Cross-border transactions will play a significant role as companies look to gain presence in high-growth markets.

To sum up, the sector will see significant M&A activity over the next five years as competition and innovation continue to fuel deal-making.

 
 
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