M&A - The Local Way

Group operators are still looking to global acquisitions as they attempt to address concerns over growth and stalling margins. This has ensured a salvo of recent M&A activity, which has seen Spanish operator Telefónica agree to buy German mobile operator E-Plus from Netherlands-based KPN for €5 billion (£4.3 billion) plus shares. Japanese operator Softbank has secured a 78 per cent stake in U.S. player Sprint for $21.6 billion (£14.2 billion).

Also in the US, AT&T has agreed to acquire pre-paid operator Leap Wireless for $1.2 billion. In Europe, Vodafone Germany has moved to acquire German cable operator Kabel Deutschland for €7.7 billion; while Telefónica has also reportedly been approached by AT&T to discuss the acquisition of a 29.9 per cent stake in the Spanish player. However, exposing scale and synergies with ownership of multiple assets across markets is extremely challenging. It is doubtful that large scale international deals have any positive impact on margins. In fact, if operators are investigating M&A options – local acquisitions will serve them much more effectively.

Continuing Consolidation

The Telecoms.com 2013 Industry Survey found that 64.6 per cent of 2,000 respondents believed that further consolidation is required in the mobile operator community. This is precisely what is taking place at the moment. Moving forward, we can expect to see an increasing amount of M&A activity in global markets. The majority of these acquisitions will take place in-market between fixed line and mobile operators and TV providers such as IPTV players. We’ve already seen this underlined by Hutchison 3G acquiring its rival operators O2 Ireland and Orange Austria. The Croatian subsidiary of operator group Telekom Austria, Vipnet, also recently acquired three regional cable network providers OKI, Kabelska televizija Šibenik and the residential customer segment of Metronet. This is being driven by increasing take up of triple play services, as modern smartphone and tablet users require both fixed and mobile broadband services with interesting content.

After 15 years of trying to rationalise multiple assets in differing markets, this localised M&A is a reflection of the fact that operators have been largely unsuccessful in this endeavour. Vodafone, often hailed as one of the operator groups to make a success of international M&A activity, recorded its first ever drop in annual revenues in May. Vodafone’s income dropped 17 per cent and overall revenues fell 4.2 per cent to £44.4 billion. This marked the first revenue decrease since Vodafone was spun off from Racal as an independent company in 1991.

However, do not expect to see global telecoms M&A activity tail off. This will also intensify as operators stubbornly refuse to accept that these large-scale M&A deals are not beneficial – in the long term.

Mature markets are likely to be the stage from which increased M&A is launched. These regions of the world boast very high mobile penetration and much more advanced mobile network technology. Operators in these markets are forced to turn to acquisitions, in order to ensure that they can generate some kind of market evolution.

As underlined by recent activity – the majority of deals will be one operator acquiring another. This has already been evidence by the recent market activity of O2 and Hutchison 3G. However, there will also be increasing involvement in deals from private equity players. This is due to the fact that these players are much more distanced from the industry and more rational as owners. Theses attributes make private equity players much more efficient in achieving synergies and delivering cost reductions. Secondly, these organisations are drawn to the predictable and stable profits that consolidated markets are likely to deliver over time.

As M&A rises, because the industry eagerly seeks growth and margin improvement, there are some within the industry who argue the growth operators seek should be derived from innovation in telecoms services and technology. However, while innovation is important, it should be noted that over the last 30 years innovation has seldom come from operators but from other industry players. In the 80s and 90s it was companies like Motorola and Nokia that represented innovation and over the last 10 years it has been Samsung, Apple and Google.

What they have in common, in contrast to operators, is that they are genuinely global companies. For operators, their ownership of mobile networks means it will always be better to focus their efforts regionally. Carriers must concentrate on building, maintaining and operating their networks. When it comes to innovation, their efforts in this respect should be around business models and how they bundle, and sell, their telecoms services to consumers.

Are you Local?

Large-scale international mobile M&A deals can be extremely challenging for operating groups. Putting aside the usual complexity that can be caused by achieving approval for the acquisition from the target company’s regulator; there is the fact that these deals require a scrupulous level of management. In most deals the execution is not meticulous enough and a cost structure that is far too high ends up being retained.

Managing many intentional assets can also bring about diseconomies of scale – simply because the business operation becomes too unwieldy. The effective integration of the target company and the buying company can also jar due to cultural differences between businesses. These dissimilarities will also exist between the buying company and its new footprint of customers. Any potential lack of understanding in the customer relationship will inevitably lead to further problems.

There may also be conflicts of objectives between the differing businesses; hampering the decision making process and causing large-scale disruption in the running of the business. Moreover, most of the cost drivers for international M&A deals are actually local and really don’t scale with more assets in several markets. The cost of cell sites, their maintenance and paying for energy supplies – across multiple markets – is very expensive and this is the challenge in scaling.

An acquisition in a local market is much more likely to be a good strategic fit with an operator’s own organisation. There is less risk that the integration could be impacted by any problems with cultural fit. The buying operators will also completely understand the market the target company is working in and its mobile customers. Moreover, the company is in the same geography and culture and this means that billing, customer care and operations will scale much more smoothly. Most of the aggravation and difficulty of an international M&A deal is removed. A local M&A deal is simply a much more straightforward process than an international deal could ever hope to be.

International acquisitions by operating groups will, of course, carry on as they have done previously. However, the global market we now find ourselves in is a much more challenging environment. Combine this with knowledge that operating groups now know about how complex international M&A can be; and it is a safe bet that local M&A will, eventually, become the preferred choice for knowledgeable mobile operators seeking to secure solid and straightforward growth opportunities.

Bengt Nordström, CEO of Northstream