At the TelecomFinance 2015 conference in London on 5 February, an international panel of M&A experts predicted that we will see more mobile consolidation and fixed/mobile convergence transactions this year.
The consensus view was that there would be a…
At the TelecomFinance 2015 conference in London on 5 February, an international panel of M&A experts predicted that we will see more mobile consolidation and fixed/mobile convergence transactions this year.
The consensus view was that there would be a shift towards a few, large European telecoms groups over the next five to 10 years as the continent’s leading telcos look to catch up with their global rivals.
Philip Meier-Scherling, head of telecoms M&A at Deutsche Bank, said there was a pattern change in the consumption of telecoms services and that we were now at the end of the voice-dominated telecoms world. He added that while there was revenue compression in the industry, investors were beginning to look beyond that and had a more open mind to broadband provision, which has underpinned recent M&A.
Meier-Scherling also said that there were lots of value drivers to be unlocked, including different ways to provide basic connectivity services, as well as content and other aspects of the value chain.
Pan-European consolidation
Moderator Iain Fenn, corporate partner at Linklaters, then turned that question around to Dennis Okhuijsen, CFO of serial acquirer Altice, to get the operators’ perspective.
“We think European market is still too fragmented; I think you have 35 to 40 operators serving 300 million people in Europe,” Okhuijsen said.
“If you compare that to the US, you have four or five operators doing the same.”
The CFO said that telecoms is very much a scalable industry and that it has harmonised from a technology standpoint. The more scale you have, the better your price point will be when buying from equipment manufacturers and servicing your networks, he pointed out. Bigger scale leads to lower costs.
Okhuijsen added that, over time, he expected every market to move to fixed/mobile convergence and said Altice sees it as an “irreversible theme”. Ultimately, in 10 years’ time, he believes Europe will have consolidated down to four or five players, which will drive down costs for consumers and increase returns for investors.
Simon Henry, CFO at Three Ireland, was of a similar mind. He pointed to his operator’s parent, Hutchison Whampoa, executing mergers in Ireland and Austria so that they could increase investments as costs were going up, with consumers becoming hungrier for data services.
Henry predicted that markets will continue to consolidate and that there was certainly more scope in Europe for that to happen. He said it was still early days for quad-play, but that operators were laying the groundwork for that.
Meier-Scherling weighed in, saying that telecoms needed global champions and cited Altice as a company, which has a model used in different countries and continents. He said this industrialisation process will allow telcos to become larger entities.
Okhuijsen explained that Altice now has a tried-and-tested playbook of packages it can roll out to consumers in different countries. He added that Europe desperately needs fixed-line investment, and that content needs to be sold regionally rather than nationally.
Money available
Okhuijsen also noted said that while telecoms is a capital intensive business, there was money available to scaled operators. He pointed to Altice’s debt raise for its acquisition of Portugal Telecom at the end of January, when orders reached €60bn for its €5.3bn bond issue.
Meier-Scherling said that incumbents have been too conservative with their leverage ratios, allowing “more entrepreneurial” companies like Liberty Global, Altice and Hutchison to expand.
Meanwhile, Fenn noted that the boldness of these strategic players had made it increasingly difficult for private equity to compete for assets and that instead the trend was for PE investors to leave the market.
Markus Wagemann, head of the telecommunications department at the German Federal Cartel Office, explained that the European Commission’s stance on M&A was continuing to soften and that it was understanding operators’ perspective more than ever. He said that the EC’s role in telecoms mergers was also likely to become more prominent as companies with larger revenues combined. Local regulators may try to rule on these deals, but Wagemann did not expect the EC to delegate.
Terry Rhodes, co-founder of Eaton Towers, said another driver in the M&A environment was the tower space.
He pointed to operators in Africa, where Eaton is present, which have looked at their credit ratings and concluded that it makes sense to sell their towers to raise funds and cut costs.
Rhodes said this has become a key part of telcos’ strategies, but that it raised issues for Eaton in cases when they share one mobile operator’s towers and want to do M&A with a rival.
He also explained that infrastructure players like Eaton were still in expansion mode and not ready to consolidate yet – there are only four scaled independent towercos across 50 African countries.
Panellists:
- Dennis Okhuijsen, CFO, Altice
- Terry Rhodes, founder, Eaton Towers
- Markus Wagemann, Head of Telecommunications Department, German Federal Cartel Office
- Simon Henry, CFO, Three Ireland
- Philip Meier-Scherling, Head of Telecoms M&A, Deutsche Bank
- Iain Fenn, Corporate Partner, Linklaters (moderator)
