ANALYSIS: The billion dollar telco club
In April 2015, Russian billionaire Mikhail Fridman reinstated his ambitions for the telecoms industry when he announced plans to invest in telecoms and technology companies across the US and Europe with his private equity fund LetterOne Technology (L1Technology).
With an initial funding of $16 billion – stretchable to $25 billion – L1Technology will be utilised to acquire businesses ranging from traditional telecoms groups to internet companies. The technology offshoot of L1Technology will act as holding company for the 48% in VimpelCom, owned by Fridman, and the 13% share in Turkish telecoms operator Turkcell.
“We think that Europe is currently most attractive because of the consolidation processes that are gathering strength there. The time is right [to invest],” Alexei Reznikovich, chief of L1Technology told reporters.
“We are looking at Russia and Southeast Asia, too, but we think that Europe is the most obvious candidate given the dynamic of the sector's development,” he added.
In March 2015, Russia’s Alfa Telecom – of which Fridman is chairman – offered $2.8 billion to purchase a 13.8% stake of Turkcell in a bid to double its holding in the company. If successful, Alfa Telecom would become the number one mobile operator in Turkey, extending Fridman’s influence in the industry.The moves highlight the growing presence of billionaires in the telecoms industry.
“Huge cash flow, huge capital, high margins. Telecoms is a nice business for a billionaire,” said John Strand, CEO of Strand Consult. “If you are capable of raising money and getting a stake in the game, it becomes easier to [acquire again]”.
This particularly the case in Europe where telecoms operators are facing increasingly tougher pricing competition and financial pressure. This hasn’t deterred billionaires, who appear to be choosing to achieve scale through mergers.
“Their opinion is that when things are going down, it will become better, soon enough,” said Strand. “So while the industry is consolidating, they go all out and take on the roles of consolidators.”
Other high-profile billionaires that have been active in the telecoms market, include Hutchison Whampoa’s Li Ka-Shing, Altice’s Patrick Drahi and America Movil’s Carlos Slim.
Li Ka-Shing – Asia’s richest person, nicknamed ‘China’s Warren Buffet’ – stated his intentions for the European market, when his Hong Kong-based company Hutchison Whampoa announced plans to purchase the UK’s second-largest mobile operator O2 from Spain’s Telefonica.
A potential merger with Three would see Li own the UK’s largest mobile group. Li is said to be divesting his assets in property, retail and ports and moving into telecoms and technology, and is likely to pursue other European targets moving forward.
Rivalling Li for a top spot in Europe is Patrick Drahi, founder of Altice, who in February placed a €3.9 billion bid for French media group Vivendi’s Numericable-SFR.
In the same month, Drahi reportedly stepped up plans for a potential takeover of Bouygues Telecom, with the two companies said to have held informal discussions. For Drahi, an acquisition of Bouygues would mark Altice’s third multi-billion dollar deal in a year, after its €17 billion acquisition of French mobile operator SFR in 2014 and its €7.4 billion purchase of Portugal Telecom’s Portuguese assets from Brazil’s Oi.
Fridman, Drahi and Ka-Shing are joined in Europe by the most high profile billionaire of them all; Carlos Slim.
Slim has been active in European markets since 2012 through the purchase of stakes in Dutch operator KPN and Telekom Austria. His focus on the region has been heightened by sweeping reforms in Mexico aimed at reducing America Movil’s dominant position in the market.
Although the investments have yet to pay off, Slim has shown further commitment to the region by pumping an additional $750 million into Telekom Austria in November 2014. America Movil has said it wants to use Telekom Austria as a base for further expansion into central and eastern Europe, where the company already has operations in six countries, including Bulgaria and Croatia.
“Slim’s stakes in KPN and Telekom Austria have until now been a financial disaster, but he believes it can turn into something good long-term, when the market comes around,” said Strand.
“Billionaires are not focused on the short-term. They are focused – and can afford to – take a more long-term view.”Regulators stands between billionaires and any remaining high-profile mergers this year.
While the European Commission has in recent years adopted a more sympathetic approach to consolidation, its new competition chief, Margrethe Vestager, has said that mergers must not raise consumer prices.
Renznikovich said L1Technology aims to disrupt the traditional telecoms industry using new technology to change business practices. Some European telecoms businesses, he said, risked “dying” unless they change their “old fashioned” mindsets. “New acquisitions will benefit from our significant expertise, and will gain access to our existing customer base, which numbers over 200 million across existing networks,” he added.
Strand believes bigger opportunities for billionaires’ lies outside of Europe, predicting that their next moves will be made in the former Soviet Republics, Asia and Africa.
The modus operandi employed by the billion dollar club is simple. “They are the challengers in the market. They don’t behave like the incumbents. Their focus is to change the market, bring competition, bring down prices and gain an even bigger market share. These are the deal makers. They know how to make things happen,” concluded Strand.