Convergence Back on Telecoms M&A Radar As Values Surge

The value of Europe's telecoms mergers and acquisitions (M&A) market has increased by more than 316 percent over the past three years, according to a new report by PricewaterhouseCoopers. The report reveals total deal values of over €150 (US$201) billion for both 2005 and 2006 compared to €36 (US$48) billion in 2004. Some substantial deals have also returned such as the €6 billion plus acquisition of Wind in Italy and Amena in Spain, while 2006 saw the €25 billion acquisition of O2 by Telefonica.

European deal volumes have remained generally stable over the past three years with 433 transactions in 2004, 447 in 2005 and 422 in 2006.

International cross-border acquisitions continue to represent the largest share of deal activity, accounting for 42 percent of the activity in 2005 and 2006. The buyback of minority interests and consolidation has been a major driver of deal activity at the domestic level. The largest growth has been the scale of transactions by financial investors rising from 6 percent (in total) in 1999 to 24 percent (combined 2005 and 2006).

Philip Shepherd, telecommunications, media and technology leader strategy, PricewaterhouseCoopers commented "The surge in telecoms deals can, in part, be attributed to the restoration of the large players' balance sheets and their refocus on fixed-mobile convergence and international expansion. However, as our research shows, cross-industry based convergence deals are still relatively small and have attracted a disproportionate amount of interest both from the marketplace and the media.

"Telecoms operators are looking beyond their core markets and are trying to build complementary businesses to capture a greater share of consumers increased spend on communications, media and entertainment, blurring the traditional divide between the communications and media markets.

"With mobile markets reaching saturation point, we believe that some of the drivers in the market suggest that pursuing convergence will yield rewards."

Key findings of the report include:

• European players chase domestic consolidation to build integrated platforms: Major European players have returned to the acquisition trail accounting for 39% of deal activity. 2005 saw several incumbents acquire full control of mobile operators (France Telecom's acquisition of minority shareholders in mobile operator Orange and Eircom's re-entry into the mobile market with its acquisition of Meteor for €420 million.) This reversal of the trend to divest assets responds to the decline in revenues for fixed services and the perceived importance of capturing a customer base that is increasingly seeking to use one provider for all its communication needs.
• Fewer players, higher stakes: Maturing markets and strong domestic competition have spurred another round of in-country consolidation across the fixed and mobile sectors. Creating scale through in country consolidation has been at the heart of several other headline deals in the last couple of years. In 2005, 23 percent of deals by value were classed as consolidation, although this percentage dropped in 2006 with only 13 percent of deals representing some form of in-country acquisitions.
• Mobile: In the mobile market there has been widespread recognition that the fourth, and in some cases the third place, operators will struggle to compete in national markets. An example of this was in Greece, where TIM Hellas merged with its smaller competitor Q-Tel to create a mobile business with a subscriber base in excess of three million.
• Cable: European cable operators have also pursued consolidation in their efforts to compete with incumbents. In Spain, ONO, one of Spain's leading cable companies acquired Auna TLC for €2.2 billion. Private equity has also played a significant role in the M&A activity in the European cable market. Cinven, a major player in the cable space, completed acquisitions in France, Belgium and Luxembourg.
• Equipment manufacturers scale up to compete: The opening up of significant new markets for telecoms equipment ? such as Africa and China ? combined with the strong competition of Korean and Chinese manufacturers has seen scale becoming more important for equipment manufacturers. 2006 saw a substantial increase in deal activity from the equipment vendors with deal value at €15 billion, exceeding the 2000 peak levels of €14 billion.

The last major boom in telecoms corporate activity in 2000 saw the execution of deals designed to achieve truly global businesses operating across all markets. These days, telecoms companies are pursuing a more selective international strategy.

In addition to making the largest acquisition of 2005 and 2006 (O2), Spain's Telefonica has also expanded into Eastern Europe with the acquisition of Cesky Telecom from the Czech Government for €2.8 billion. Others have also joined the potentially higher growth markets in Eastern Europe with Telekom Austria buying MobilTel in Bulgaria (€1.7 billion) and Telenor buying Mobi63 in Serbia & Montenegro (€1.5 billion). While in the West, France Telecom successfully acquired Amena in Spain for €6.2 billion in 2005.

A noticeable trend in the European region has been the expansion of the Middle East operators. Orascom acquired Wind in Italy for €10.3 billion and also recently acquired TIM Hellas in Greece. The US operators have been noticeably absent, deciding instead to focus on domestic consolidation and the integration of recent deals.

Philip Shepherd, telecommunications, media and technology leader strategy, PricewaterhouseCoopers commented "Looking ahead for the remainder of this year we expect deal activity to continue and the expectation is that with the scale of capital, both equity and debt, the possibility of another landmark telecom acquisition by a private equity player cannot be excluded." "

Posted to the site on 11th April 2007