M&A 2008

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

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Babworth Ltd is registered in England and Wales No. 6620167 - http://www.babworth.com

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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.


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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


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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]


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


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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.


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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]


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


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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.


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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]


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.


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M&A 2008

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