Telecoms M&A activity in 2016
10 March 2016 | Gareth Willmer
Away from the headline deals, some of the most interesting M&A activity has indicated a growing focus on new business segments.
The appetite for global telecoms M&A maintained a healthy outlook in 2015 as carriers sought to continue towards consolidation in many markets. A variety of interesting activity took place not only from the perspective of traditional telecoms assets, but also in fresh business areas – so a set of diverse drivers looks likely to propel M&A activity into 2016.
Some observers believe that, moving forward, carriers will seek further deals involving the cloud and data centres and broaden into new business verticals, as well as building their potential in areas such as machine-to-machine (M2M) and the internet of things (IoT) in a bid to see off ever-increasing competition from over-the-top (OTT) players.
As a gauge of the overall buoyancy of telco M&A, financial-data company Mergermarket estimates that the value of global transactions in the sector rose from $224 billion in 2014 to $260 billion last year – even though the number of deals remained almost the same, at 194 compared with 196. Furthermore, the value of deals has been sustained between these levels for the past three years, roughly double the numbers reported for several years before in the wake of the financial crisis.
So full-steam ahead for the coming year? Not exactly, it turns out. Although the appetite for deals may well be there, a couple of factors mean it is not totally clear-cut how things will develop. One is that the regulatory outlook for large-scale deals in Europe is slightly hazy, following a few events towards the end of last year that muddied the waters.
This began last September, when TeliaSonera and Telenor pulled out of the merger of their mobile operations in Denmark, after being unable to reach an agreement with the European Commission on its conditions for ensuring the market remained competitive. Some observers interpreted this as the EC growing frostier on consolidation, even though it had seemed to soften its stance just the previous year in allowing Three Group’s buy of O2 Ireland and Telefonica Deutschland to snap up German mobile operator E-Plus. This has therefore raised question marks about other deals, such as some of the consolidation activity in the UK.
Another source of potential deal uncertainty this year comes from reports that emerged at the back end of 2015 of a slump in the leveraged finance markets in North America and Europe, which could make debt financing for deals more expensive and challenging. Joseph Radecki, head of telecommunications for KPMG Corporate Finance, says he hesitates to say the market will see a meaningful reduction in M&A deals as a result, but that it could pose a risk.
But even if there are hold-ups in headline consolidation deals, carriers still have the chance to spread into adjacent business markets, as well as seek cloud and data centre acquisitions in a bid to improve their position in the enterprise IT space. And Matt Walker, an analyst at Ovum, points out that such deals are relatively easy compared with in-market consolidation because they tend to raise far fewer regulatory issues.
“These deals come in many flavours. They’re not the largest or most frequent, but this is the area to watch over the next few years,” says Walker. He says targeted acquisitions can aid telcos that are trying to become cloud players in terms of gaining fresh infrastructure and skill sets – and points to the example of NTT Communications, which he cites as becoming an important global cloud player over time by purchasing a series of companies in that space. For NTT Com, this trend continued in 2015, chiefly through taking an 86.7% stake in Germany-based European data-centre operator e-shelter last June – consolidating the increasingly strong presence the company has established in Europe in recent years by gaining assets in the key data-centre market of Frankfurt and other German cities, as well as Austria and Switzerland.
The ethos behind this type of deal, says Michael Wheeler, EVP of global IP network business unit at NTT America, is that “we really see ourselves as being an ICT provider, not just a telco”, and that having co-location facilities from the ground up helps to avoid missing out on key margins. Last year, NTT Com also bought Cyber CSF, a data centre provider in Indonesia, to strengthen in a market where it had already seen considerable growth.
Wheeler expects the carrier’s M&A activity this year to be on a similar scale of that in 2015, with maybe one big deal on a level comparable to that of e-shelter and one or two smaller ones. Another carrier that has made significant strides in the enterprise and data-centre arena is Telstra, which wrapped up its purchase of telecoms provider Pacnet last year. Paul Abfalter, director of Pacnet integration at Telstra, refers to the sheer scale that this gives the company: “The combined network now represents up to 30% of intra-Asia lit submarine capacity, and a footprint of 58 data centres around the world,” he says.
Ovum’s Walker believes that future acquisition targets for telcos could include cloud and data-centre players such as Equinix, Rackspace, DuPont Fabros and Digital Realty, although it is unclear whether these could happen in 2016 or the longer term. In any case, he expects that as 2020 approaches, data centres will play a growing part in the service offerings of carriers, which will attach diminishing importance to whether a vendor is from the IT or telecoms world as telcos also provide more services in new business areas. “M&A is not driving all of these changes, but is accelerating them,” he says.
Conversely, he says, data-centre providers themselves could eventually evolve through acquisitions and investments to become more akin to enterprise-focused telcos. And by doing so, they could in fact become even more attractive to traditional carriers.
Indeed, several significant intra-market transactions took place within that space last year. In late 2015, for example, Equinix gained clearance for a deal to acquire TelecityGroup in a bid to broaden its network and cloud density in Europe. The deal officially completed on January 18, 2016. And in September, Interoute struck a deal to buy Easynet.
But for telcos, there is also reason to exercise caution in this area, and there are some developments that hint at uncertainties going forward. At the time of writing, rumours emerged in the press that in the US, Verizon had begun a process to sell its data-centre assets, including those it gained from the acquisition of data-centre provider Terremark in 2011. AT&T and CenturyLink have also allegedly been considering the offload of assets, with some attributing this to fierce competition from public cloud providers such as Amazon and Microsoft.
Tom Mannion, director of valuation and business analytics at BDO, an international network of public accounting, tax and advisory firms, reflects on how such players are reshaping the entire market and the stiff challenge that telcos have facing up to them. “With cloud, how can they compete against Amazon and these new types of players? I don’t know the answer to that,” he says. “Amazon is jumping dramatically into cloud computing… and is a dynamic force in that marketplace.”
Nonetheless, he believes carriers will ultimately need to make acquisitions in areas such as data centres, the cloud, machine-to-machine (M2M) communications and the internet of things (IoT), and work out how to make the most of these opportunities, given that their traditional revenues are being eaten into from all sides.
Some carriers are looking into M&A in the area of M2M and other new business segments as ways to bolster their overall digital offerings in a bid to keep up with the transforming market – with different players pursuing diverse routes to achieve this.Verizon wrapped up its $4.4 billion acquisition of AOL last summer, with a view to capitalising on the company’s leadership in the digital content and advertising space. In announcing the deal, the carrier said the acquisition would also “support and connect to Verizon’s IoT platforms, creating a growth platform from wireless to IoT for consumers and businesses”. However, the company would not comment on what this will entail.
Meanwhile, Orange Business Services acquired fleet-management and vehicle-tracking solutions company Ocean last April, boosting its M2M offerings in this area. “Fleet management is at the centre of the customer experience and connected objects,” says Olivier Ondet, director of marketing, strategy and communication for Orange Business Services.
This move came a mere month after Orange announced its new Essentials2020 strategic plan to meet the changing needs of the telecoms market in areas such as IoT, Big Data and the cloud, including an objective of increasing the contribution of IT services to the revenues of Orange Business Services by 10% by 2020. Not only that, but the company also announced at almost the same time that it had struck a deal to acquire the remaining shares in Cloudwatt, the cloud services provider it established with the French government, to help strengthen its enterprise cloud services – another key focus of Essentials2020. And this came just after Orange launched Digital Ventures, which aims to support start-ups in areas such as IoT, the cloud and enterprise data, in line with other operators that have launched similar ventures in recent years.
All these moves suggest that Orange is seeking to pursue a diverse approach to the transforming market, and that a key to this will be strategic acquisitions to put it at the centre of this. Other carriers are also looking at new areas, with Telecom Italia finalising deals in the automotive and education sectors last year and seeking to also refocus away from the traditional business towards other sectors such as ICT security, smart enterprise and smart retail. The company has also merged its Olivetti and Telecom Italia Digital Solutions units to aid the transition towards digital innovation.
“The focus of Telecom Italia acquisitions in 2015 was mainly on expanding the portfolio of services beyond the traditional core business, leveraging on the market opportunities offered by digital innovation,” says Claudia Ballardin, head of operational M&A at Telecom Italia.
Telstra has its own approaches to the transforming market. “The telco market, like many others, is going through significant change due to global economic factors, rapidly evolving consumer trends and technology-driven disruption,” says Scott McGibbony, director of corporate strategy at Telstra.
“This environment brings its challenges, but also opens up investment opportunities, especially for telcos willing to take a broader view and embrace the opportunity to be a leader in technology and innovation.”
Apart from its Pacnet buy, Telstra has sought among other things to grow the health business that it launched towards the end of 2014 through a number of acquisitions last year of players such as health analytics firm Dr Foster and telemedicine solutions company Anywhere Healthcare. As McGibbony explains, “health is an example of how we are rethinking ourselves at Telstra as a technology company rather than as a traditional telco. As a telco, we bring the experience in connectivity and technology to drive change and efficiency in a sector characterised by rapidly growing costs.”
For telecoms carriers, says Mannion, the main thing is to try and prepare for how the market may change in the future, even if the path ahead is not entirely clear – and how this pans out will help shape M&A. The key question, he says, is “how is the market going to shake out? These telecoms companies have to be positioned today for the market of tomorrow.”