M&A 2008


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M&A 2008

  1. 1. Telecoms Mergers and Acquisitions 2008/9 M&A far more strategic in 2008/9 The value of telecoms M&A dropped in 2008 overall, although volumes dropped by much less. This is because much of last year’s M&A activity was at the lower end of the market, with consolidation of small players and strategic acquisition of smaller firms by larger ones. Values were also lower due to valuations being lower last year, and because of the effect of exchange rates on some key markets. These lower valuations mean that investors and entrepreneurs are not necessarily going to get headline-beating prices, but the flipside is that it’s a good time for a cash-rich organisation to pick up rivals to expand market share or to invest in new technology. Interestingly, there was a relatively low level of so-called ‘fire sales’, and certainly nothing like the levels seen during 2001-2004. Telesperience tracked 302 M&A deals closing in 2008. This represents a sizeable proportion of total M&A in the telecoms market, but readers are cautioned that this data is gathered from publicly available information supplied by acquirers/acquirees and not all deals are publicised. The smaller the deal the less likely it is that we have picked it up. In terms of the market captured we track deals announced by service providers, and by vendors of technology that is applicable to the CSP market. If the deal is for a company providing generic IT technology which may have only minimal impact on the telecoms sector then it might not be tracked. Deals that closed after 31st December 2008 will be included in next year’s figures. The M&A outlook for 2009 is likely to be busy at the bottom end, as consolidation continues and as larger players buy their way into promising geographical or technological areas. Readers are also advised to listen to M&A advisor Sokoloff & Co’s Pete Sokoloff to benefit from his views on M&A outlook in 2009, which you can hear in Telesperience 1, available for free download at www.telesperience.com. CSP M&A There is still considerable consolidation activity in the CSP market. This is taking the form of larger service providers buying up rivals to extend their customer base, consolidation in the mobile and broadband markets, and CSPs buying into new geographical markets where they perceive there to be growth potential (for more information see the following sections on the Indian market and African market). In our view CSP M&A activity is likely to remain strong in the next two or three years. This is because telecoms operators are under increasing pressure from shareholders to show both growth and reduced opex. By acquiring a rival, CSPs can realise cost savings and benefit from reduced competition. By buying into a growth market, CSPs struggling to show growth in their home markets Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 1
  2. 2. can satisfy shareholder demands for growing revenues. Hotspots for M&A activity will continue to be India, China and south-east Asia, Africa, and Eastern Europe. However, there is likely to be continued consolidation at the smaller end of the scale across Europe and North America as broadband providers and WiFi hotspot providers are acquired. A newer trend, however, is successful CSPs from fast-growing regions buying outside their home market – taking advantage of lower valuations to expand their geographical footprint. Quite clearly there are some ‘dormant giants’ out there, in the form of large CSPs and vendors that have not yet used their muscle to internationalise their business. Figure 1 provides ten examples of M&A activity in the CSP market. Figure 1 Examples of CSP-side M&A activity in 2008 [Source: Telesperience 2009] Acquirer Acquired Value AT&T Wayport USD275 million Belgacom Scarlet EUR175 million China Telecom Beijing Corporation CNY5.6 billion Cincinnati Bell Gramtel USA USD20 million Comstar Ural Telephone (UTC) RUB1.02 billion ISM 10.2 % Eastern Telecom PHP104 million KPN Debitel Nederland Undisclosed SK Telecom 39% Hanarotelecom USD800 million Sunrise Tele2 CHF50 million Vimpelcom Golden Telecom USD4.35 billion Vendor M&A M&A on the vendor-side continues apace, but the nature of the investment has changed. There are now relatively few fire-sales, deal sizes are smaller on average, and acquisition is far more strategic. Parts of the market are at the first round consolidation stage, whereby single product vendors are being bought up by other small vendors to extend and round out their offering. This is particularly true in the content, social networking, Web 2.0 and Telco 2.0 markets. It is likely that these vendors will, in turn, be bought by larger vendors in due course, and thus this round of small deal M&A is a precursor to larger ticket deals in the next couple of years. Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 2
  3. 3. An example of consolidation at the lower end is the acquisition by Automattic, the owners of WordPress blogging software, of two small software developers last year – Polldaddy and IntenseDebate. Automattic is a four-year old start-up funded by Polaris Ventures, True Ventures, Radar Partners and CNET. Its other projects include bbPress (Forum Software), Akismet (an anti- comment spam system, WordPress MU (a multi-blog community system), Ping-O-Matic (a pinging service) and Gravatar (avatars). Social networking technology was another area of interest in 2008. Vodafone, for example, picked up ZYB a mobile-based social networking vendor for EUR31.5 million and Nokia acquired Plazes for an undisclosed amount. At the other end of the scale, AOL completed the acquisition of Bebo for USD850 million. Some major IT vendors that have interests in the telecoms market are also in a very good position to keep acquiring despite the credit crunch. These are vendors with considerable cash assets and include: • Cisco, which has cash reserves of USD29.5 billion (as of Jan 2009). In February 2009 it announced it intended to issue USD4 billion in bonds, raising speculation it was planning further acquisitions • IBM, which has USD12.9 billion in cash and cash equivalent (as of December 2008) • HP, which has cash and cash equivalent reserves of USD11.2 billion (as of February 2009) • Oracle, which has cash and short-term investments of USD10.5 billion (as of November 2008) • Google, which has cash and cash equivalents plus short-term investments of USD15.8 billion (as of December 2008) • Microsoft, which has cash and cash equivalents plus marketable securities of USD20.7 billion (as of December 2008) • Apple, which has cash and cash equivalents plus marketable securities of USD25.6 billion (as of December 2008). With acquisition prices at very reasonable rates, now is a good time for major companies to expand their footprint at relatively low cost – particularly as companies in a less fortunate position may be forced to sell assets they would otherwise have wished to hang on to. The fate of Skype is an interesting one to contemplate in 2009. Its owners, eBay, have a modest USD3.2 billion in reserve but there have been persistent rumours that eBay wishes to sell Skype, for Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 3
  4. 4. which it paid USD2.6 billion in 2005. If eBay chooses to sell there are certainly plenty of vendors who could afford to buy it (see list above) plus a range of large CSPs interested in aggressively extending their VoIP business. Another trend has been for CSPs to buy into the vendor market. BT, for example, continues to buy companies that fit with its goal of offering a rounded business service. This included Net2S (which provides consulting and engineering services for critical business solutions to large corporates) and Frontline (which provides IT consulting, infrastructure services, systems integration and IT outsourcing). BT also bought Ribbit, a telco 2.0 platform provider. Ribbit’s platform allows for application developers to interact with telecoms networks via its soft switch. BT paid USD105 million for the US firm in July 2008. Figure 2 provides 10 examples of M&A activity in the telecoms vendor market. Figure 2 Examples of Vendor-side M&A activity in 2008 [Source: Telesperience 2009] Acquirer Acquired Value AOL Bebo USD850 million Amdocs ChangingWorlds USD60 million Automattic PollDaddy, IntenseDebate Undisclosed BT Frontline SGD202 million BT Ribbit USD105 million Cisco Jabber Undisclosed Nokia Plazes Undisclosed Oracle BEA USD7.2 billion Sun MySQL USD1 billion Vodafone ZYB EUR31.5 million Geographical perspective: some regions are ripe for M&A The credit crisis is not affecting all geographical markets uniformly. While Western Europe, North America and other developed economies are in the front line, others face the knock-on effects of the credit crunch – notably China which has prospered from supplying manufactured goods to the West. It is our belief, however, that the impact on China has been somewhat overstated. Other economies are proving even more resilient or relatively unaffected by the credit crunch. In particular, a wide Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 4
  5. 5. variety of players are looking to invest in markets that are still showing good growth potential such as India. In other growing markets – such as those in Africa – consolidation is taking hold, fuelling M&A. Indian market overview Assocham, the Indian Associated Chambers of Commerce and Industry, announced in December 2008 that there were 20 major M&A deals in the Indian telecoms market worth around USD9.2 billion and accounting for 33% of total M&A activity in India. The majority of the deals were foreign firms investing in the Indian market (accounting for USD8 billion of the total), with Indian firms spending USD408 investing in foreign acquisitions. The remainder was accounted for by merger activity. Despite the economic downturn affecting much of the globe, the Indian telecoms market seems to be resilient at present – hence the propensity for foreign firms to wish to invest there. According to data from the Telecom Regulatory Authority of India (TRAI), 15.26 million net connections were added in January 2009 – a record – with 10.81 having been added in December 2008. This means the total number of connections reached 400 million in January 2009. During 2008 the market grew from 273 million to 385 million, fuelled by growth in mobile as fixed connections shrunk by 3.43 million. What’s more the country still holds considerable growth potential. Despite teledensity tripling in just three years, India has just 400 million connections for a population of 1.1 billion people, and to date growth has largely been confined to major cities. However, around 70% of the population lives in untapped rural areas and, as mobile networks reach out into these areas, Gartner forecasts that connections will almost double to 737 million by 2012. The huge growth potential makes the market highly attractive to foreign firms whose home markets are reaching saturation. Joining the likes of Vodafone, which is already active in the Indian market, the biggest M&A deal in 2008 saw NTT DoCoMo spend USD2.7 billion on a 26% stake in Tata Teleservices, while Etisalat bought 45% of Swan Telecom for USD900 million. In early 2009, Tata Teleservices completed its acquisition of another 30% stake in Neotel; while Telenor is buying 60% of Unitech for USD1.1 billion to be completed in multiple tranches. The largest domestic deal saw Idea Cellular spend USD637 million on a 40.8% stake in Spice Communications; while Reliance Globalcom bought UK-based Vanco Group for USD365 million. The outlook for M&A in India in 2009 is therefore cautiously healthy, as Indian firms take advantage of economic conditions to buy offshore, and as foreign firms continue to invest in India to gain a share of what is still a growing market. Turkcell is also currently rumoured to be in talks to buy a 51% stake in Datacom for USD2.2 billion. Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 5
  6. 6. However it should be noted that the value of outbound M&A fell significantly in 2008. Assocham announced that while there were 72 outbound M&A deals across all sectors between April and August 2008 (up from 54 deals the year before), the value of these deals had fallen to one-fifth of those the previous year. It’s important to remember though that Indian IT firms have considerable cash reserves - TCS, Infosys, Wipro, Satyam, HCL Technologies and Cognizant all have more than USD500 million, with Infosys alone hoarding around USD1.8 billion of cash. But even beyond the big six firms, there’s still plenty of liquidity left in the Indian market. Foreign investors will, in future, have to be slightly more cautious, as subscriber and revenue growth in India is fast reaching the point at which there is a risk that profitability will decline. As penetration rates in large cities climb above 80%, the next wave of subscriber growth will be fuelled by rural telecoms and by subscribers with lower incomes. The cost of building the infrastructure to reach out to rural populations will inevitably see both capital expenditure and operational expenditure rise. The challenge will therefore be to maintain profitability while growing, rather than simply just growing for growth’s sake. On the positive side, building networks out to rural areas is good news for NEPs. Figure 3 provides 10 examples of M&A activity in the Indian market or involving Indian firms. Figure 3 Examples of Indian M&A activity in 2008 [Source: Telesperience 2009] Acquirer Acquired Value Etisalat 45% Swan Telecom USD900 million Idea Cellular 40.8% Spice Communications USD637 million NTT DoCoMo 26% Tata Teleservices USD2.7 billion OnMobile Telisma EUR11 million Reliance 10% Sequans Communications Undisclosed Reliance Vanco Group USD76.9 million Reliance Anupam Gobal Soft Undisclosed Reliance 90% eWave World Undisclosed Tanla 85% Openbit USD15.81 million Zylog Ducont USD7.5 million Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 6
  7. 7. African market overview For the last three or four years there has been sustained foreign interest in the main African markets – Nigeria, Kenya, South African and Angola in particular – which has translated into ongoing investment and increasingly high prices for African businesses. Vodafone, for example, went on something of an African shopping spree last year, notably announcing a GBP1.4 billion bid for another 15% slice of Vodacom. Vodafone has indicated that it will use Vodacom as a vehicle for future African investments – this is how it is handling its investment in Gateway Telecoms – although this stance does not apply to Kenya, Ghana or North Africa where it already has investments. Vodafone’s majority stake in Vodacom also gave it control of the largest CSPs in Lesotho, Tanzania and the Democratic Republic of Congo, and the second largest CSP in Mozambique. In addition, it spent USD900 million on 70% of Ghana Telecom (which is, as stated, outside the Vodacom arrangement). These deals are positioning Vodafone more squarely against other pan-continental groups such as MTN, which itself had a busy year. MTN acquired both Arobase Telecom and Afnet (which are both CSPs in Cote d'Ivoire), as well as investing USD90 million in Verizon SA (which completed January 2009). Last year it also announced a joint venture with Amaracos Holding, which will acquire 50% of MTN Cyprus. Under this agreement, MTN Group will continue to be responsible for managing the operations of MTN Cyprus but MTN Cyprus will also acquire Infotel (a handset retailer in Cyprus trading as Germanos), as well as ISP Otenet (Cyprus). MTN’s operations now spread across 21 countries including Afghanistan, Benin, Botswana, Cameroon, Congo-Brazzaville, Cote d’Ivoire, Cyprus, Ghana, Guinea Bissau, Guinea Conakry, Iran, Liberia, Nigeria, Rwanda, South Africa, Sudan, Swaziland, Syria, Uganda, Yemen and Zambia. There are signs that prices for African firms are starting to come down, which inevitably will fuel more consolidation. The South African market in particular contains a number of cash-rich companies which therefore can afford to invest while values are more realistic. Added to this Vodafone’s investment in Vodacom really ups the stakes in terms of competition in southern Africa. This could signal other ambitious players to start expanding their footprint. An important change in Africa is the Kenyan government’s announcement that foreign telecoms investors will not have to have a local partner to do business in the country. Previously companies investing in Kenya had to reserve 30% of their shareholding for local partners. 2008 also saw France Telecom and Dubai’s Alcazar Capital acquired a majority stake in Telkom Kenya for USD390 million. The buyers immediately began restructuring the business, laying off more than 17000 workers. France Telecom is an active participant in the African market having made acquisitions in 12 African countries, including a recent investment in Ugandan Hits Telecom. Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 7
  8. 8. M&A activity in Southern Africa appears to have only dropped slightly from 2007 levels – possibly by as little as 2%. The big question is whether these volumes will be repeated in 2009 and whether the credit crunch effect will bypass African markets, or whether its effects are still to be felt. Certainly, as is the case with India and other fast-growing markets, there are still plenty of foreign firms interested in investing. In addition the current economic condition makes foreign investment by African firms far more viable. Figure 4 provides ten examples of M&A activity in Africa or involving African firms. Figure 4 Examples of African M&A activity in 2008 [Source: Telesperience 2009] Acquirer Acquired Value France Telecom 51% Telekom Kenya USD390 million France Telecom 53% Ugandan Hits Telecom Undisclosed MTN Arobase Telecom Undisclosed MTN Afnet Undisclosed MTN 69.4% Verizon SA* USD90 million Neotel Transtel Telecoms ZAR230 million Telekom SA 25% MultiLinks (takes total to USD130 million 100%)* Vodafone 15% Vodacom GBP1.4 billion Vodafone 70% Ghana Telecom USD900 million Vox Storm ZAR360 million * = completed January 2009 Further resources Teresa talking to Pete Sokoloff, from M&A advisors Sokoloff & Co, January 2009, Telesperience 1 (available for free download from www.telesperience.com – Starts at 56 min 10 sec). Datasheet of telecoms M&A deals, updated monthly (Excel format)– for further details contact enquiries@telesperience.com. A selection of deals will be highlighted during the year on our blog www.microsperience.com and in the news section of Telesperience. Telesperience is published by Babworth Ltd – http://www.telesperience.com Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com 8