After a lull that lasted almost two years due to the global economic slowdown, the appetite for mergers and acquisitions (M&As) in the telecom sector increased rapidly in 2010. As per industry estimates, telecom overtook financial services as the busiest M&A sector in 2010. The year saw the closing of major M&A deals like Bharti airtel’s acquisition of Zain Africa, Vivendi SA’s acquisition of SFR (Vodafone Group PLC), America Movil SAB de CV’s buyout of a 99 per cent stake in CarsoGlobal Telecom SAB de CV Telmex. Globally, the sector witnessed 354 deals in 2010, with the total deal value increasing by 82 per cent over the same in 2009 (these figures only pertain to those deals where the transaction value was disclosed).
The momentum had been building up and total global M&A transactions (closed and announced) during January-April 2011 were valued at $69.8 billion, as compared to $50.3 billion in 2010.
Catalyst for M&As
Operators have been facing declining ARPUs and margins due to intense competition in the telecom sector. This pressure has led to increasing M&A activity.
The trend over the past few years shows that the saturation of domestic markets and expansion of the global footprint are the major reasons for increased M&A activity in the telecom sector. Cross-border deals have found favour with operators for several reasons. First, they allow the acquirer to enter a new market by bypassing entry barriers. For instance, Indian M&A norms allow up to 75 per cent foreign direct investment in a telecom operator, which leaves organic growth as the only option.
Foreign M&As also provide an opportunity to the acquirer to expand its business to new and less explored geographies. Bharti airtel’s $10.7 billion acquisition of Zain’s African operations in 2010 is a clear example of this consolidation trend. The Zain deal instantly extended Bharti’s footprint across several emerging African markets and made it the fifth largest telecom operator in the world.
Another major cross-border deal is VimpelCom’s $6.5 billion merger with Wind Telecom that controls Orascom Telecom. The combination would lead to the formation of a global operator with operations in 20 countries, creating the world’s sixth largest telecom group.
Growing through the organic route is becoming more difficult with the limited availability of new licences and spectrum in an established market, and this is also driving M&A deals. UAE-based Etisalat, which was aiming to expand into markets in the Middle East and North Africa, has expressed interest in securing a 51 per cent stake in Iraq’s Korek Telecom to avoid bidding for a licence in the country. Reliance Industries Limited’s (RIL) acquisition of Infotel Broadband, after the latter won broadband wireless access (BWA) spectrum, is another example of this trend.
Several large operators have entered foreign markets to capitalise on their accrued business knowledge of the domestic market and get a headstart in new markets. Bharti airtel, for instance, is reaping the benefits of its tried-and-tested low-cost model in Africa. The M&A activity has also been driven by technological transfers and development. Qualcomm entered the Indian market and bid for BWA spectrum in order to promote its long term evolution platform in India.
While entering foreign markets has been a strong trend, intra-market M&As for consolidation in the existing market have also become popular. This has been an outcome of the high fragmentation in the global telecom sector. According to a report by Booze and Company, the top 5 per cent operators in a country accounted for 62 per cent of the telecom industry’s revenues in 2009. In contrast, for sectors like health care and oil and gas, the top five per cent companies contributed 79 per cent of the total revenues. Therefore, there is a huge gap, which is likely to be bridged by a consolidation wave.
The acquisition of a rival offers advantages like an instant addition to the subscriber base and foray into new regions. Not only do these deals help in eliminating competition, but also generate economies of scale. Network enhancement and spectrum addition are other benefits of such consolidations.
Even from the target company’s standpoint, merging with an established player is a profitable proposition. It may help the company gain scale, compete with bigger players, advance its technological strength and capitalise on the experience of the larger operator.
US-based wireline operator CenturyTel, Inc.’s $10.6 billion acquisition of Qwest Communications International, Inc. in March 2011 is an example of an intra-market deal. The acquisition made CenturyTel the third largest provider of local phone services and helped consolidate the weak local phone industry. It was also a much-needed respite for Qwest that was weakened by the collapse of the internet boom at the turn of the century and by the ouster of its senior management.
CenturyTel has been aggressive in its expansion plans – it bought out the local business of the Sprint Nextel Corporation and is likely to buy out a wireless company soon. Following the inorganic route, CenturyTel has come a long way from being a rural company based in Louisiana to now competing with major players like AT&T and Verizon Communications.
In a bid to improve scale in a highly competitive market, UK’s T-Mobile and Orange merged their operations in 2009. The merger created the largest player in the domestic market with a combined market share of 37 per cent, as compared to the highest share of 27 per cent held by O2 prior to this deal. The deal provided other benefits like stronger network coverage and a bigger subscriber base.
The biggest and most talked about intra-market deal is the proposed $39 billion merger of US-based AT&T and T-Mobile. The merger, which still awaits approval from regulatory bodies in the US, would make AT&T the largest service provider in the country with an over 40 per cent market share. More importantly, after the merger, more than 70 per cent of the market would belong to the two players – AT&T and Verizon. AT&T’s inability to manage the surge in data traffic due to limited spectrum has been one of the key drivers of this move.
Russia based MegaFon’s acquisition of fixed line operator Synterra in June 2010 for $745 million was prompted by the former’s intention to expand into the broadband internet and long distance segments. Also, Synterra’s wide network infrastructure significantly enhanced MegaFon’s optic fibre network. In the following year, MegaFon acquired 100 per cent shares of the NetByNet Group. The acquisition of NetByNet allowed the operator to enter the fixed broadband internet, digital TV and IP telephony segments in the Moscow, Belgorod, Voronezh, Kursk, Lipetsk, and Orlov regions. Moreover, it gave MegaFon a headstart as NetByNet was the largest fixed broadband operator in these markets.
Meanwhile, some deals have resulted from the shareholders’ attempt to gain full control over a joint venture (JV) or a specific operation in which they have an existing stake. For instance, British telecom giant Vodafone recently bought out the Essar Group’s 33 per cent holding in their Indian JV, Vodafone Essar. Similarly, Indonesian telecom operator PT Telekomunikasi Indonesia (Telkom) is structuring a buyout of SingTel’s stake in their jointly owned mobile venture PT Telkomsel. These acquisitions are aimed at consolidating and synergising decisions on strategic and financial issues. Also, in some cases, stakeholders fail to reach a consensus on the future growth path and parting ways is the best bet.
The way forward
Going forward, convergence will emerge as a key driver for future M&A deals. Given the saturation levels in their core businesses, operators have started branching out into segments that promise higher growth. Also, operators do not want to miss the growth opportunity presented by the high potential of convergence in the wireless world.
They have started venturing into popular domains like online media and TV access services. For example, European telecom operators have started acquiring TV broadcasters. Telefonica bought a stake in Spain’s Canal Satellite Digital in 2010. Also, France Telecom has bought a 49 per cent stake in the video sharing site Dailymotion.
Mobile banking is another area of interest and is likely to see JVs if the regulatory environment allows for such an integration.
Social networking is another emerging area for future M&As. For instance, in a first-of-its-kind move, Telefonica bought an 85 per cent stake in Spanish social networking site Tuenti in 2010.
Net, net, the telecom M&A trend is gaining momentum across the globe. To make the most of these opportunities, operators should start with a focused approach and consider all business aspects before entering into such transactions. Evaluating the business as well as factors like culture and alignment of the broad vision of companies is of prime importance for the success of such deals.