Brussels’ more relaxed stance on in-market consolidation is likely to fuel M&A-related financing activity among European telcos this year, according to a panel of experts speaking at the TelecomFinance Conference 2015 on 5 February in London.
The…
Brussels’ more relaxed stance on in-market consolidation is likely to fuel M&A-related financing activity among European telcos this year, according to a panel of experts speaking at the TelecomFinance Conference 2015 on 5 February in London.
The panel generally agreed that the low cost of financing in 2014 led to an increase in M&A deals. However, they expect activity to really pick up now that the European Commission has shown it will accept four-to-three consolidation deals under certain conditions.
Thomas Koehrer, managing director of TMT at UBS, said that, despite excellent debt market conditions last year, his team did not see M&A-related financing activity across the board. Cable operators were considerably busier than their mobile counterparts, largely as a result of regulatory constraints upon the latter.
“The industry has been open for consolidation which has fuelled the need for debt. But only now do we see there is a bit more visibility on what the regulatory environment is going to be,” he said.
Dominic Ashcroft, managing director of leveraged finance capital markets at Goldman Sachs, said debt has been a big facilitator recently in terms of buyer meets seller. Their most active client over the past two-and-a-half year has been European telecoms group Altice, which has relied heavily on debt to fund acquisitions of companies including SFR and Virgin Mobile in France.
“From that perspective, debt markets have definitely accommodated [M&A] and I expect this to continue going forward,” he said.
Karim Nasr, CEO of London-based hedge fund management firm Digital World Capital, agreed regulators’ changing attitudes toward consolidation are very important from an investment perspective, but noted that it remains to be seen what impact concessions agreed to by the merging parties will be.
Ashcroft is optimistic that M&A deals will continue to drive financing activity, saying he expects in-market consolidation will probably continue with the same theme over the next 24 months.
His team has seen a bottoming out of the operating model, he said, with many formerly struggling telcos starting to turn themselves around.
Nasr and Ashcroft both predicted that private equity will play a smaller role in the telecoms sector going forward.
Nasr also said he thinks it will have a role in infrastructure but acknowledged that it is tough for PE firms to compete with operators in terms of the synergies offered by a potential deal.
A lot of PE firms which have been prominent players in telecoms in the past are now deciding it is not even worth competing, he noted.
Ashcroft agreed that it is tough for PE firms to compete from a hard dollar perspective, but pointed to US-based KKR’s acquisition of the SBB/Telemach cable group in 2014 as evidence they can succeed.
Shift toward institutional financing
Ashcroft and Koehrer said they think the historically strong reliance on bank financing in European debt markets, largely a result of the continent’s divided nature, is changing. In their view, institutional financing will become more prevalent, as it is in the US, meaning capital market forces will have more influence on pricing.
Ashcroft predicts this will “mean a more sustainable market for Europe” in future.
As a result, he expects banks to become “extraordinarily aggressive” in their efforts to win business.
That said, Ashcroft noted that the regional banking market is still very active, with players keen to fund local deals.
Mark Atkins, director of global credit solutions at Huawei, said he expects Chinese banks to become more prominent players in Europe, noting that many are very keen to move from development to relationship roles.
While entering Europe has provided a steep learning curve for many, they are quickly expanding their presence here, he said.
Huawei has not had any problems doing business in Europe and the US in terms of regulation, he pointed out, adding that it is always transparent in its dealings, and Europe, in particular, welcomes investment.
At present, many of Huawei’s customers need credit to buy infrastructure which, he acknowledged, puts debt level ratios under pressure. Acquisition finance can stay with target companies for a long time after they are acquired, meaning they lack the funds to roll out important infrastructure such as LTE networks.
However, Atkins noted that economic and political volatility in European markets is becoming a major concern – potentially making it less attractive than emerging markets.
“Although there’s more volatility per se in emerging markets, we are sometimes more comfortable with the latter because there’s still a lot of growth there … and they still have a lot to deliver in their markets,” he said.
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Moderator:
- Ed Ansell, chief editor, Finance Publications, Finance Information Group
Panellists:
- Karim Nasr, CEO, Digital World Capital
- Mark Atkins, Director of Global Credit Solutions, Huawei
- Dominic Ashcroft, MD, Leveraged Finance Capital Markets, Goldman Sachs
- Thomas Koehrer, MD, UBS
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