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Eyes turn to Africa and Mid-East for telecoms M&A deals as private equity stalls

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Africa and the Middle East are poised for increased M&A activity and consolidation in the telecoms industry following a global decline in deal value and volumes in 2007 says a report from PricewaterhouseCoopers. The report reveals that the total disclosed deal value globally fell from 332 billion in 2006 to 185 billion in 2007, while deal volumes declined from 1,260 in 2006 to 1,190 in 2007.

One of the principal reasons for the decline in deal value in 2007 was the lack of mega-deals compared with 2006. The only deal in 2007 that exceeded ‚20 billion was the ‚23 billion merger of America Telecom with America Movil in Latin America whereas in 2006 there was the Bell South acquisition by AT&T for ‚58 billion plus a number deals greater than ‚10 billion. The much discussed ‚25 billion acquisition of Bell Canada has yet to complete though recent regulatory approvals are encouraging.

Philip Shepherd, partner and TMT strategy leader at PricewaterhouseCoopers, commented "Last year was a curate's egg in the telecoms deal market, with funding conditions in the first three quarters promoting a high level of activity, particularly by private equity, followed by the black cloud of the credit crunch in the fourth quarter. Private equity transactions led the way reaching a high of nearly 30% of the total value, but this activity has all but ceased now."

There was surprisingly limited activity from the major operators other than Vodafone, though interestingly the proportion of deals transacted in the emerging markets of Central and Eastern Europe, Latin America and Middle East and Africa regions actually grew as a proportion of global deal activity since 2005, accounting for 22% of all deals in 2007, compared with 11% in 2004.

Shepherd added "As consolidation in the developed markets of the US and Western Europe appears to have largely played out for now, it will be Africa and the Middle East that will see the greatest growth and potential for acquisition and consolidation, with interest in wireless being the principal driver."

Some of the largest operators in the Middle East have been rapidly consolidating their presence across the region. Kuwait's Zain (formerly MTC Group) has expanded its operations in the region, perhaps most notably securing the licence to launch a third wireless operator in Saudi Arabia for ‚4 billion. It has operations in six countries in the Middle East and 14 in Africa, joining Etisilat and the South African company's of Vodacom, MTN and France Telecom as the key players in Africa. Qtel and Saudi Telecom have joined the fray with Qtel's acquisition of Watanyia (which at ‚2.8 billion was the largest in the region) and Saudi Telecom's acquisition of a 35% stake in Oger Telecom.

Elsewhere in developing markets, India has finally been cracked by a western operator with Vodafone's acquisition of Hutchison Essar. However it is the potential of the enormous Indian and Chinese operators to make moves outside the region which is most intriguing. While there has been nothing of note yet, there is a changing sentiment amongst businesses in both countries encouraging overseas acquisitions.

The credit crunch will have a significant impact on the market in the future with private equity the hardest hit as its ability to leverage large deals will be severely constrained.

"Private equity deals represented nearly 30% of the total value but it is hard to see financial buyers now having much influence in large deals. Interestingly, a number of private equity backed deals are now approaching a time when an exit would be expected. Current valuations and funding constraints are likely to delay such exits.

"But the industry is closely monitoring sovereign wealth funds which could prove a big player in the future. The largest funds from Abu Dhabi, Singapore, China and Kuwait have collective investment funds of more than ‚4 trillion which could reach ‚15 trillion by 2010. With the depth of available funds and strategies that are driven by the requirement to diversify, these may emerge as major players."

Global overview

Consolidation in the Western European market has largely been completed for now and reflects the decline in both average deal size (‚313m in 2007 down from ‚502m in 2006) and total value (‚52 billion in 2007, ‚82 billion in 2006). At the start of the year the buoyant capital markets supported the view that many of the European operators outside of the Big 4 (Telefonica, Vodafone, France Telecom and Deutsche Telecom) were prey to financial players. The fact that none of these materialised before the credit crunch indicates that, while the debt funding was available, the potential equity returns could not be supported.

Central and Eastern Europe saw stable year-on-year deal volumes and total value. However, deal values have declined significantly from the peak of 2005 which saw nearly ‚13 billion in deals compared to ‚4 billion in 2007.

From a significant peak in 2006, largely the result of a handful of major deals including AT&T's acquisition of Bell South for ‚58 billion and the ‚25 billion demerger of Viacom, the value of North American deals declined substantially to ‚69 billion in 2007 from ‚179 billion in 2006. Deal volumes showed a more modest decline.

Vodafone's ‚9.3 billion acquisition of Hutchison Essar in India was the most significant in Asia Pacific as regulatory uncertainties had previously made unlocking this enormous market very challenging for acquirers. Vodafone was the only player from outside the region to make a significant transaction in 2007, with the remainder of the ten largest deals completed by businesses from within the Asia Pacific region.

Latin America saw the single largest completed transaction of 2007 anywhere in the world, with the ‚23 billion merger of America Movil (Latin America's largest mobile operator) with America Telecom in Mexico. However, this deal was more than ten times the size of the next largest transaction in the region, Telefonica's ‚1.9 billion acquisition of Colombia Telecommunicaciones. America Movil was behind two of the five largest deals in the region, with the acquisition of Puerto Rico Telephone for more than ‚1.3 billion.

Deals in the wireless sector saw the largest proportional increase in 2007 with the total proportion of all deal values growing to 50% in 2007. Fixed operators were relatively quiet in the developed world yet the attention given to developing markets suggests a clear focus on growth opportunities as evidenced by France Telecom acquiring in Kenya and also targeting Ghana, Deutsche Telecom's interest in CEE and Telefonica looking at Latin America.

Philip Shepherd concluded "Looking forward, the current financial market turmoil could significantly impact deal doing. Major financial buyer led deals are unlikely though declining asset prices could encourage many incumbents to return to the deal table in 2008 and beyond, particular the rapidly growing Middle East, Indian and Chinese players while activity in Middle East and Africa is set to continue

Other areas of interest are the growing potential for infrastructure deals supported both by operators increasingly exploring value creation through network separation, and the growth of specialist infrastructure funds to finance such disposals. We also see the battle to capture value from the growth of mobile internet hotting up. Traditional handset vendors are now competing with new and powerful entrants such as Apple and Google and we expect content deals similar to Nokia's Navteq acquisition to escalate."

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