Carrier M&A trends: is a new world order emerging?

10 March 2013 | Kavit Majithia

As European incumbents struggle to keep up with emerging market players, Kavit Majithia investigates whether the industry is witnessing the birth of a new global elite?

A new elite group of players from emerging markets is challenging the old guard. Just ask France Telecom-Orange. It could be facing a double-pronged attack.

On one side, it faces the entrance of América Móvil into Europe, which occurred mid-last year – a move that has made all European operators stand up and take notice. Backed by the world’s richest man, this is a company that seemingly holds no bounds in its investment strategy.

Elie Girard, EVP of strategy and international development at Orange, admits that it has to now compete “with an additional competitor in the continent – a competitor that has an armour of free cash flow for international development”.

That is not his only concern. Over in Africa, a core market for the French operator’s international growth, its position is being challenged by Airtel. The Indian operator’s entrance into Africa has been labelled “very disruptive in terms of pricing and marketing strategy”.

Domestically and internationally, France Telecom is facing a threat. And with industry revenues declining across the board in Europe for the past three years, the French operator is not alone in operating under stretched market resources.

Flirting with Europe

América Móvil’s entrance into Europe, according to Wally Swain, senior analyst and Latin America expert at Yankee Group was a move that highly fits in with the company’s philosophy.

“They are bottom feeders,” says Swain. “They love picking things up where they can go to bankers and say, that while assets are cheap, they just need people with new ideas with new debt to make the company work again.”

And at the moment, there aren’t many other places in the world where you could find assets as distressed as they are in Europe. Because of that, Swain, like other industry experts, highly doubts that Carlos Slim’s 21% and 28% stake acquisitions in Telekom Austria and KPN is the end of the company’s flirtation in Europe. “They have a desire to stay within a narrow cultural channel, and its initial attack on German-speaking countries could be preceded by a full frontal attack on Spain.”

Slim, worth approximately $69 billion according to Forbes, is a man that can afford to take the odd risk. In fact, the company’s entire entrance into telecoms was based on that same premise, after it chose to pick up fledging operator Telmex on the cheap during the Mexican Peso crisis.

The risk certainly paid off, and América Móvil is now established as the most valuable company in Mexico. Worth a mammoth $93 billion, the telecoms behemoth is highly unlikely to be deterred from Europe because of an initial loss of $2 billion from its stakes in Telekom Austria and KPN, announced last year.

Telekom Austria’s head of wholesale, Stefan Amon, reiterates a commitment to the affiliation on its side, telling Capacity that it is working with its new partner “to find every synergy it can”. He says: “Everyone is interested in doing business and it’s a two way learning process.”

For Móvil, taking a stake in debt-riddled incumbents like Telekom Austria and KPN was relatively easy enough. But taking a share from the continent’s larger players, which Móvil surely has the resources to do, is not likely to be as easy.

Swain says he would “never bet against an incumbent in any market”, and it is highly doubtful Slim will be out to ruffle the feathers of Deutsche Telekom, France Telecom or BT during this period of transition for European operators.

However, there are subsidiaries in the continent which are up for sale, with operators in the continent scoping ways to reduce debts by divesting non-core assets in the region. Móvil could yet roll its dice on TeliaSonera’s Spanish unit Yoigo, which it claimed it was not interested in last year. Orange Spain is also reportedly up for grabs.

Out to Africa

With Móvil looking for a way in to Europe, it may come as a surprise to many that France Telecom exited the high growth market of Latin America over 10 years ago.

It went on an aggressive divestment spree, beginning with the sale of a 7.1% stake in Telmex in June 2000, before divesting a 51% stake in CTE (Salvador), a 14% indirect stake in Telecom Argentina and ending with a 25% stake sale in Brazilian fixed-line operator Intelig in 2008.

Two years after its final Latin American divestment, France Telecom embarked on its Conquests 2015 project, and the company turned its attention to expanding its presence across Africa and the Middle East. It has now established operations in approximately 17 countries.

Girard claims the company was fully aware of Latin America’s booming telecoms market, but believes “the cultural ties between the Middle East, Africa and France made it easier to invest there”.

He adds: “Africa and the Middle East have higher prospects for growth and its projection for telecoms GDP is higher than both Asia and Latin America. To set up from scratch, considering our divestment over a decade ago, and to compete now with both América Móvil and Telefónica, is truly a difficult challenge.”

France Telecom therefore intends only to tighten its grip on Africa and the Middle East, with Girard revealing to Capacity the company’s plans to expand into five additional markets in the continent in the coming year, including Mauritania, Burkina Faso, Ethiopia, Algeria and Libya.

And while a commitment to establishing the Orange brand in these underserved markets is a priority, Girard hopes to improve the overall infrastructure of these countries, while also helping to establish a range of international standards for telecoms development.

“There are presently a range of tenders for management contracts in Libya, and we are working hard to help improve and develop the industry there. In many countries you have to develop new technologies in the same way you have to develop the whole country.”

The attraction for France Telecom in Libya and Algeria is clear. Both markets remain significantly under penetrated, with economies that are cash rich. And with the uptake of smartphones increasing, there remains great growth potential for value-added services and mobile broadband.

Girard eludes to the idea that the company’s strategy is tailored around certain geographies. News released last month that the company is set to sell off a 20% stake in Portuguese telco Sonaecom, as part of a long-term strategy to divest operations in markets it does not have a strong foothold in, further indicates an increased focus on Africa.

Jessica Gendall, associate analyst at Pyramid Research, believes the company has specifically targeted establishing a strong position in South Africa, after recently launching its new initiative Orange Horizons in the country.

It introduced a range of e-commerce services and a content specific website, with the initiative expected to be utilised in an attempt to seek out business opportunities in countries where France Telecom is not presently a mass market telecoms provider.

Gendall says: “France Telecom is testing the waters in South Africa and getting a feel of the market before unleashing some bigger plans”. She predicts the company could either be set to launch an MVNO in the country, or possibly make a play to acquire a South African operator in the near future. “Despite the risk involved, we could see France Telecom make a play for Cell C, Telkom’s 8-ta or even Neotel.”

Attractive Africa

France Telecom will certainly have to react quickly in the African and Middle Eastern markets, where it now finds Airtel increasingly breathing down its neck. Airtel is now present in 17 countries in Africa and the Middle East. And with connectivity through three subsea cables on the east side of Africa and three cables on its west coast, the Indian operator has a strong foothold in the market.

Ajay Chitkara, CEO of Airtel Global Business, is altogether buoyant as he claims “the centre of gravity is changing”. He says bluntly: “Emerging markets are now leading the growth in telecoms.”

Importantly, Airtel’s business head also does not rule out the company making another acquisition in Africa or the Middle East. Market watchers predict the company will be inclined to make advancements and acquisitions in the content space, and considering India’s low broadband penetration rates, it is becoming increasingly essential that content creation comes from within the country, rather than originating from the US or other parts of Asia for example.

“We have to make sure we build capabilities, IP hubs and data centres to ensure we are moving in the right direction to ensure video and content creation occurs inside India,” says Chitkara.

Chitkara tells Capacity that he realised the company’s future did not lie just in the voice market; almost as quickly as the company realised its growth opportunity does not lie in Asia-Pacific. And so it aggressively began to target its home market, Africa and the Middle East.

“India in many ways is adjacent to the same opportunity that lies in these two continents. We had to change our strategy from core carriers to managed services, and the core level in Africa and the Middle East fits into what we are trying to achieve in India.”

In the same way, Chitkara’s global business strategy was tailored towards the changing business needs in emerging markets. Indeed, Airtel’s new strategy could be something of a directive for other global wholesale providers.

Like France Telecom, the operator discovered that focussing solely on the carrier market in Africa was not going to cut it. “It was a case of adding customer segments to existing operations,” says Chitkara. “Moving on to service providers, content providers and OTTs was clearly the next logical step.”

Locating Latam

Airtel, América Móvil and even France Telecom could learn a thing or two about establishing a strong presence in multiple continents from its rivals over at Telefónica.

“We can only speak for ourselves and Telefónica today is the only telco with a significant presence both in Latin America and Europe,” says an insider at the company.

Indeed, Telefonica’s story is an interesting footnote. Its entrance into Latin America in 1992, through the acquisition of an operator in Chile, was highly criticised at the time.

The Spanish operator was accused of exposing itself to a region dealing with a plethora of corruption, inherent political instability and ongoing debt crisis. 21 years on, and Telefónica is largest network operator in the region, and also operates as the largest telecoms operator in Europe considering global annual sales figures. It is fair to say its gamble certainly paid off.

The company has further been aggressive outside of Latin America, and has acquired a 9.7% stake in China Unicom, in addition to leading a group to acquire rivalling firm Telecom Italia. Today, Telefónica claims one of five Europe citizens are its clients, and it has amassed a record 306.6 million customers as of last year.

With the Eurozone crisis ongoing, the company has struggled in its domestic Spanish market, which still accounts for approximately 28% of its overall revenue.

Swain says Telefónica has attempted to distance Spain from its Latin American business this year, and claims “there has been ample evidence that Telefónica has become more intelligent to the problems in Spain”. He says: “When the crisis first hit, they cut spending in Latin America and there was pattern of behaviour which indicated they would divest in Latin America to improve the situation in its home market.”

Since its initial panic, news released at the end of February 2013 says that Telefónica has now held off any plans to spin off a stake in its Latin American subsidiary, further indicating it plans to sustain its position in both geographies.

It was thought Telefónica would list 10%-15% of its Latin American business in 2013, valued at approximately €40 billion in an attempt to curb heavy debt from poor results in recession-hit Spain.

By shelving those plans, our insider told Capacity it, like France Telecom-Orange in Africa, was beginning to focus on e-commerce services in its attempts to grow within Latin America. “Mobile finance, particularly focussed on non-banking segments, e-health solutions (especially in remote areas) and cloud services have greater potential in the region,” he says.

Since its entrance in 1992, Telefónica’s position in Latin America has gone from strength to strength. It was only last year when both Telefónica and América Móvil’s relatively cushy status in the continent was somewhat compromised. Regulators have now begun to assess charges imposed by both operators to interconnect on their networks, which is intended to open the region up for more competition.

However, aside from Telefónica, Telecom Italia, through its indirect control of Telecom Argentina, is the only other European player in the continent.

This landscape could also be set to change as infrastructure and IT services continue to develop, in addition to more stringent regulation on the top two providers.

Internexa, for example, has been developing a vast fibre-optic network to provide carrier services and increase capacity exchanges. “We are attempting to promote the migration of international content that is located in the US in particular to get content closer to customers,” adds Genaro Domínguez, CEO at Internexa.

Domínguez believes the continent is still growing as an IP and communications hub, and his company has worked hard to address the issue by creating an open network to allow companies to inter-connect into the region. “We are preparing to receive international companies by improving the quality of IP in the continent and it is necessary to construct open network capabilities to do this.”

Where the growth lies

In América Móvil, there is one powerhouse that is capable of tearing up the rulebook. And with the recession-hit market of Spain seeking a cash injection, in addition to rumours that there are two operations in the country up for sale, analysts predict the market is well and truly open for Slim to attack.

Telefónica Spain, according to our insider “is on a transformational journey”. The company remains upbeat, claiming that “simplifying its portfolio and retaining competitiveness has ensured it has visible results since beginning the process a year ago”.

Slim’s prowess, however, is unlikely to extend towards Africa, and Swain shares his surprise that América Móvil has never even been mentioned in the same breath as Africa, the Middle East or even Asia.

“All these markets have similar socio-economic conditions to Latin America and you would think it would natural for them to attack, yet there has never even been any press speculation with regards to Móvil taking on Africa.”

This leaves France Telecom to battle for market share with Airtel and anyone else who wants to join the African party.

To Girard, however, the landscape for investment, and the potential for growth is distinctly different for a Latin American operator compared to a European one.

“It is important to keep in mind, when you add up all available cash between us for example, and Móvil, the ability to create a European champion in global telecoms is a whole different challenge,” he says.

“European operators, including France Telecom, Deutsche Telekom, KPN and even Vodafone, work in a very different landscape to AT&T, Verizon, China Mobile and América Móvil.”

Will Móvil eventually prove that it is not just a major force in Latin America, but on the global stage too? Only time will tell.