The past year saw a flurry of various types of deal in the MEA region’s telecoms sector, and 2013 looks set to bring a fresh crop of deals. CommsMEA asks the experts about the latest deal trends and how telcos can stage successful deals.
Federico Membrillera, managing partner and head of corporate finance, Delta Partners
Victor Sunyer, director, corporate finance, Delta Partners
Paul Black, director of telecommunications, Middle East, Africa and Turkey, IDC
Edwin Grummit, partner, Analysys Mason
Matthew Read, principal analyst, Informa Telecoms & Media
Bhanu Chadda, senior research analyst, telecoms, MEA & Turkey, IDC
Chady Smayra, principal, Booz & Co
CommsMEA: What trends do you think we will see in 2013 in terms of M&A in the region’s telecoms sector? Could we see some large scale deals or are we more likely to see smaller stake sales etc?
Paul Black: The telecommunications market in the Middle East and Africa has seen relatively strong levels of mergers and acquisitions activity since the beginning of 2011. Market performance was driven by opportunistic acquisitions of local telecom operators, internal market consolidation, and efforts by operators to improve their revenue-generating capabilities by acquiring companies that complement their core telecom services. IDC believes that there is still potential justification for large carrier groups in expanding to new MEA markets and benefitting from the scale that expansion can create, but operator acquisition opportunities offering clear value are becoming scarcer.
Matthew Reed: The MEA telecoms market is beyond the land-grab stage; there has already been a certain amount of consolidation; and additionally there are fewer obvious takeover targets than in some previous years – so, at the risk of giving a hostage to fortune, the likelihood is that M&A actively will be relatively light over the coming year. But there will be some activity – for example Vivendi is considering selling its stake in Maroc Telecom, which has attracted interest from Qtel, Etisalat and Korea Telecom.
Other operators from mature markets in regions such as Europe and the Far East might also be drawn by growth potential within the MEA region – but of course some, such as Orange and Vodafone, already have an extensive presence in the region and so are now more occupied with growth in their existing operations rather than further acquisitions. And for mature-market operators that do not already have a presence in MEA there are fewer clear takeover targets.
Libya might offer some investment opportunities once sufficient political progress has been made. Telecoms markets are maturing and increasingly the growth opportunities are in data services rather than in voice services or in connecting new subscribers – and as a result operators might consider investment or M&A in potential growth areas such as digital services rather than seeking to take over other telcos.
Victor Sunyer: According to Zephyr, overall Middle East M&A market deal value increased 90% from 2011 to 2012, reaching $25bn. In 2013, we expect M&A activity for the telecom sector in the MEA region to remain strong. This follows the global trend in the market, which bottomed out in 2009, and is following the resurgence in emerging markets activity and decoupling from limited growth in global M&A.
In the MEA telecom M&A market, we have also seen increased activity, with several multi-billion deals happening, such as the Qtel shareholding increase in Asiacell or France Telecom increase of its shareholding in Mobinil. We have also seen smaller transactions in tower infrastructure executed by MTN and Orange, and consolidation in highly competitive markets such as the CDMA merger in Nigeria. In 2013 we expect the MEA telecom sector to continue growing through M&A, as operators need to rebalance their portfolios and focus on balance sheet and returns. We expect deal sizes to remain small.
Chady Smayra: 2013 might see the revival of telecom regional M&A activity. 2012 was already somehow encouraging on that front after three years of very little activity especially after the Qtel / Wataniya deal was completed in October for $1.8 billion.
After the initial land grabbing stage that saw the regional telecom operators grow aggressively until 2008, times are today for portfolio rationalisation. We will therefore continue to see other moves to acquire control over existing strategic assets in telco groups’ portfolios while non-strategic assets will be let go. Already we could see that 67% of the transactions between 2009 and 2012 were to acquire control over existing assets in the portfolio against 24% for the period between 2007 and 2008.
Operators are also more and more reluctant to factor synergies in the price they are willing to pay for their acquisitions as they prefer to keep this upside for themselves. On the geographical front, it seems that operators are more interested in markets that are closer to them as their experiences in Asia and Africa were often not so encouraging. Finally, and this is still nascent in the region, telecom operators will be increasingly interested by growing in adjacencies, beyond the core telecom sector.
CommsMEA: What type of companies might operators look to acquire?
Paul Black: Pressure on operators’ business cases and the need to bring in revenue from changing consumer Internet use patterns will require operators to be increasingly strategic in their M&A activities. More than ever, M&As have to fit within operator groups’ overall strategies and focal points, and most operators cannot afford poorly considered investments. Operators need to increase their presences in content and distribution value chains to drive revenue growth and maximise the benefits of costly network upgrades. A corollary to this trend is that more operators should consider M&A transactions to obtain assets that benefit their overall network services, such as acquiring companies for their spectrum, content delivery platforms or cell tower holdings.
Federico Membrillera: From a growth perspective, operators in MEA still need to position themselves in the digital world, avoiding being perceived as “dumb pipes” and continuing to battle for the ownership of the customer with OTTs. In this space, where innovation is key driver, operators will be increasingly looking to invest into early stage companies, acquiring smaller but highly strategic targets.
Continuing in the broadband and data space, another key hot topic for 2013 in MEA and other emerging markets will be upcoming 4G/LTE licences. These licences are likely to be one of the last opportunities for medium sized telecom groups to enter into certain markets and build a “broadband play”.
Finally, we expect acquisitions from operators into ISPs in the region’s key markets, providing with opportunities to continue to grow in the access to the high growth broadband market. From a consolidation perspective, we expect to see most of the transactions driven by large groups developing portfolio consolidation strategies, as focus on efficient capital allocation and returns will be the name of the game for the next year.
In this respect, large groups will continue to look into selling opportunities for their smaller, less profitable operations, especially in markets in which they do not have a strong competitive position. We also expect the offloading of non-core assets to continue to drive M&A transactions, for instance through the establishment of JVs between operators and tower management companies to manage passive infrastructure.
Finally, we expect deals involving consolidation of minority stakes to continue in the next year. Consolidation of minorities provides telecom groups with an opportunity to capture value at reasonable valuation levels, without the diligence risks of new market entry transactions. This year we have seen several large M&A transactions happening in this space, such as Qtel/Wataniya, Qtel/Asiacell, FT/Mobinil, or Zain/Zain KSA post debt restructuring.
In respect of large scale deals involving large multi-country telecom groups, we think it is not unlikely to see at least one large transaction happen in 2013. High price expectations, liquidity constraints and immaturity of capital markets in the region remain a challenge for these deals to go through. Only large groups with strong cash position will be looking into these deals, and we expect them to approach these transactions with great diligence, focusing on value, availability of synergies, and process execution.
Edwin Grummitt: The fundamental drivers of M&A don’t really change. I am cautiously optimistic about the volumes of activity that we are seeing next year. There is an increase in pressure in many markets on profitability, which puts pressure on operators to reduce costs, which is why we see operators doing internal transformations and swapping their tower assets, finding ways to set up joint ventures to deploy LTE networks and the like.
Part of this is history at least in some markets, with lots of infrastructure going into the ground. In Africa you can see markets with seven parallel networks, and this is not really sustainable in a market when growth starts to slow down. There will be activity in those kind of markets because there will be consolidation, and that consolidation will either be because there is not enough spectrum to go round or just pressure on peoples bottom lines.
In heavily regulated environments it is not always easy for one player to buy another. So part of the activity we see, which will be part M&A related, will be finding other ways to consolidate, which will be around joint ventures on towers, at least on the RAN, but there will also be acquisitions of the
On the other side, we still have a situation in this part of the world where we have highly cash generative, profitable incumbents. They have cash that they have to do something with. In a typical market if you have an operator or any other company with a big cash pile they are obligated to do something with it – invest it in something – or return it to their shareholders. So even though there is nothing like the appetite we saw in 2005-2007 for operators to go out and buy every green field licence for billions of dollars, the opportunities are less but the operators are still opportunistic in terms of the acquisitions.
The third driver is that Europe is having a pretty tawdry time at the moment which will mean that telecoms assets themselves may not be distressed but the owners of those assets could be distressed and that means that potentially you will get decent valuations or at least you will get assets at a good price, or assets will become available.
CommsMEA: What changes have there been in the way operators assess and stage M&A in the past couple of years?
Paul Black: In the past, telecom carrier groups could often justify cross-border acquisitions of telecom operators in the MEA region under the assumption that expansion would benefit their bottom lines. However, this scenario has changed as even relatively immature markets are now often quite competitive. Furthermore, the price at which an operator can be acquired is also becoming increasingly important. Even telecom operators in the least mature MEA markets face challenging decisions about investing in their networks and how to grow in competitive markets. No guarantees exist at this point that a carrier group can buy into an emerging market at the operator level and profit when it decides to leave. Thus, while significant opportunities may still exist for multinational carrier groups, the strategic considerations driving their expansion are becoming increasingly important.
Federico Membrillera: We see telecom operators approaching M&A with a greater degree of caution and at a slower pace today. All deals need to be understood carefully before moving forward, especially from a rationale and value perspective. Moreover, CEOs are more focused on the bottom-line of their own operations as market growth has slowed down and competition increased, and are devoting less time to consider inorganic growth opportunities With lower competition for any given deal, M&A teams are also taking more time analysing transactions before moving forward, in situations where some years ago the execution would have been much faster.
CommsMEA: How can operators get a deal right? What would you highlight as the main stumbling blocks for operators in the region in terms of M&A?
Paul Black: Transactions that bolster the share a party holds in an operator or that lead to the acquisition of a smaller local player often earn less publicity than cross-border transactions, but they can have a positive impact on an operator’s results. Network sharing agreements or other forms of cooperation within a market can also benefit an operator’s bottom line. Especially when the economics of cross-border investing have become more challenging, it might make sense for certain operators to concentrate on consolidating their existing market presences and improving their business lines and then waiting for specific opportunities in new markets.
Victor Sunyer: The main stumbling block for M&A deals to go through today is valuation expectations. While trading multiples for telecom operators in the region have compressed in the last couple of years and converged with more mature market multiples within the 4-5x EBITDA multiple range, sellers expectations remain anchored at the 7-9x levels where M&A has happened in the past few years.
Another key stumbling block affecting M&A has been lack of political and/or macroeconomic stability in key growth markets, such as Egypt, Sudan, Iraq or Afghanistan. This has prevented operators from capitalising on growth opportunities in these markets. A common hurdle for any deal to go through today is the difficulty of predicting the availability of financing. The MEA region, albeit providing with strong growth fundamentals, has not been isolated from the global debt crunch, preventing or slowing down some of the M&A processes in the last two years. The key point is that financing has been made available for a number of telecom transactions, but visibility has been difficult to assess altogether. Moreover, on the equity front, limited liquidity, transparency and regulation in some of the key equity markets in the region such as Qatar, Kuwait, Saudi Arabia and Egypt has not helped in providing with the tools to execute M&A.
From an execution perspective, qualified and efficient execution is a persistent issue in MEA markets, which often delays transactions and widens the valuation gaps. When executing M&A, deal teams face an increasing challenge of tapping into the mix of local specialist knowledge combined with professional services from leading global firms. Finally, a common problem faced by operators when looking into overseas M&A is telecom market regulatory uncertainty. This has prevented deals which required in-market consolidation in a given country from happening.
Chady Smayra: Coherence between a company’s capabilities, way to play and offering should be at the core of any inorganic growth strategy. This is also very true for telecom operators. A cross-industry study of inorganic growth shows that deals made to enhance or leverage capabilities generate higher returns.
Operators should therefore follow a clear framework that allows to assess two things: The financial value of the asset (return or growth potential), and the coherence of this asset with their capability system.
Coherence can be along several dimensions such as geography, market maturity, ownership level, type of operation or market position. In terms of process, we can talk also of other more tactical things such as ensuring board of directors and management alignment on the strategic intent behind the acquisition, and distinguishing valuation from price. It is critical to have a clear idea of the value that the asset brings to the group.
Bargaining should happen to the price and not on the value. And finally, it is important to ensure that management presentations are scheduled as part of the process. Finding strong talent to continue managing acquired assets is difficult in the region.
CommsMEA: Is there a need for much more consolidation in the MEA telecom sector?
Paul Black: Regarding consolidation, we observe different trends regarding value-chain, in-market (country level), and footprint consolidation trends. In general, we expect consolidation to be driven by value chain and footprint motives.
Value chain consolidation is expected to happen in two different ways. First, deals driven by convergence of fixed and mobile operators, especially mobile operators buying internet service providers or fixed operators focused on the business segments. Second, telecom operators are looking to consolidate content and service providers into their portfolio and fence off their service offering competitive advantage.
Regarding in-market consolidation, we do not expect this to happen in any Middle East for the next five years, with large markets with a limited degree of competition allow most players to develop a sustainable operation. In Africa, we are already seeing some in-market consolidation in highly competitive markets, for instance, regarding Nigeria CDMA.
Bhanu Chadda: For footprint consolidation, we also need to differentiate between the Middle East and African markets. In the Middle East, footprint consolidation has already taken place, with large groups such as Qtel, Etisalat and STC being positioned in all key markets with limited room for further consolidation or M&A market entries. For this reason, Middle East operators will continue to look for international opportunities focused on Northern Africa and the Levant regions.
Paul Black: We expect more African telecom M&A to happen in 2013, driven by higher footprint fragmentation and structurally higher growth opportunities, in a market where penetration rates are still low compared to Middle East and other emerging markets. MTN is the clear market leader and has strong position in all key markets. It is followed in relevance by Bharti, Vodacom and Orange African portfolios. With a higher degree of fragmentation, smaller independent multi-country groups such as Millicom, Globacom , Econet Wireless have been building their portfolios with focus on sub-Saharian Africa. This highly tiered operator structure in Africa is likely to make footprint consolidation more likely for the next years, with second and third players not belonging to a given group being targeted.