Mergers and acquisitions are back on the agenda in the MEA region’s telecoms sector, with numerous deals of various sizes occuring in 2012-13. CommsMEA asks the experts about deal trends and how companies can get deals right first time.
Dr Riad Hartani, partner, Xona Partners
Paul Black, director of Telecoms, IDC Middle East, Turkey & Africa
Jeremy Sell, group chief strategy officer, Ooredoo
CommsMEA: What trends are there in the MEA region’s telecoms sector that could influence M&A strategy?
Black: Within the GCC, transformation continues to gather momentum especially on the enterprise side as operators look to tap into the cloud opportunity for the SME market. Mobility is continuing to gain in strength and has move beyond email into the business process but challenges with security and ROI are key concerns.
On the consumer side, the lines are becoming increasingly blurred with telco, device operators and OTT providers all operating in the same space.
Specifically within Africa, investment is being made from the infrastructure providers where we have seen notable acquisitions from Liquid Telecom in countries such as Kenya, Rwanda and Uganda to name a few. Market consolidation has been very low but the pending acquisition of Neotel by Vodacom in South Africa and the acquisition of some of Warid Telecom’s assets show that the African market is finally moving towards in-country and in-market consolidation.
CommsMEA: How indepth should deal due diligence be for an M&A deal?
Hartani: It has to be very much in depth. The problems are three fold: First, a lot of what is exposed by the potential seller or their advisors is focusing on the positives, with clear workaround around challenges; second, there are technology and business model shifts that are going on in the industry that would have a big impact on the outcome of any deal when projected over three to four years versus today; and third, there are very few good case studies of successful M&A deals, specifically in the MEA region.
This is mostly due to the fact that methodologies or criteria used for other markets have been used without adequate customisation in terms of regulatory, business eco-system, political uncertainty and local lobbying etcetera.
In fact, I tend to think that a lot of the M&A due diligence going on in MEA is too focused on a linear analysis model, based on standard evaluation, where the approach should take into account a more integrated approach taking a lot more dimensions, with a specific focus on execution models post M&A.
Black: Due diligence requires all factors of market, regulatory and competition be considered, in addition to the financial performance of the company being acquired. Operators should not get lured-into playing high premiums just because there are very limited M&A opportunities available specially in the Middle East.
CommsMEA: What are main areas to assess and what potential problems with a target sometimes go unnoticed in M&A deals?
Hartani: Once one goes beyond the traditional criteria analysis, I would say the main focus would be: (1) the execution team post M&A and how they would handle the overall life cycle of evolution post initial execution of M&A deal, (2) anticipate the competition’s reaction in local markets, which tend to be very much tied up to the overall regulatory/political/lobbying eco-system, (3) what exactly are the synergies in beyond the 1+1= “possibly 3” and how can one really execute on them, as most deals tend not to leverage any real cross parties synergies; and (4) how to structure the deal in a way that focuses more on a success through incentivising the stakeholders approach, by developing a catalyst model within the acquired entity, that would give a lot of the past and ongoing initiatives a better chance of success, before getting into new initiatives pushed down by the acquirer.
CommsMEA: What challenges do you face making cross-border deals?
Hartani: Mostly geo-political, with ramifications on regulatory, lobbying and competitive areas. Anticipating such changes over time is difficult, and hence having an execution model that ensures the business is run in a way that is consistent with the macro strategies within the acquired country.
There are also challenges that are business model adaptation related, and specifically having teams that could pinpoint a country specific business model and run it, even when it goes against some of the approaches used in other regions as defined by the acquiring entity.
Finally there is the need to engage the local eco-system in the target country in a way that the success of the acquired entity would translate to the growth of this specific eco-system.
CommsMEA: What would you say is key to getting a deal right in the telecoms sector?
Black: Knowledge and more knowledge, do your homework! The days of stupendous margins in Africa are gone. You have to spend a lot of money to make a lot of money. Secondly, Nigeria is not worth the hype around it.
While it still presents lucrative returns, it is really a headache and a complex market to operate in. Other business friendly markets such as Ivory Coast, Kenya and to an extent DRC present lucrative opportunities with less of the headaches of Nigeria. The same can be said about Angola.
Also, operators should have clear strategic direction and an execution plan for integration of new ventures as in the case intra-market consolidation, as failing this could negatively impact the company’s brand and also result in wastage of financial resources.
Hartani: I think spending more time on understanding the value of the deal, and how one would execute on it, over three to five years is key. This goes beyond technology and business, and into understanding the local context in as much details as possible. In fact, it’s the local context angle that tends to make or break the deals.
CommsMEA: What is driving the current M&A activity in the region’s telco sector?
Black: The need for infrastructure assets in particular spectrum and fibre assets. In the case of the Vodacom-Neotel acquisition, the main benefit for Vodacom is access to the digital dividend and fibre assets from Neotel. In Uganda, 3G spectrum is a problem and through Warid, Airtel has additional R3G spectrum. Liquid’s acquisition of KDN was for the latter’s fibre assets, an area Liquid is aggressively developing in the region. This also resonates within the GCC when you look into KSA and Mobily’s acquisition of Atheeb Telecom.
We are also witnessing geographical expansion from the major GCC telecom groups, primarily to mitigate slowdown in home markets. Ooredoo’s expansion in Myanmar, while Ooredo, KT and Etisalat’s interest in Morocco are examples.
CommsMEA: What type of targets are operators looking for?
Black: Fibre and lucrative spectrum holders I.e. 700-900 MHZ, 2.3/2.6/3.6/1.8 GHz spectrum holders. Key targets are the operators which fit in the strategical direction of geographical / portfolio expansions. In case of geographical expansion regional operators look for markets where demographics are similar. For example Morocco fits well with Etisalat’s portfolio as it could bring popular services and offers from other markets with little customisation.
For international operators like KT, Vodafone and Orange emerging market provide new revenue diversification opportunities and help mitigate risks associated with concentrated revenues.
With regards to inter-market consolidation operators are likely to acquire companies from adjacent domains provided it enhances their service delivery capabilities and helps them accelerate transformation in either of the two directions - ICT provider or digital media provider.
CommsMEA: What was behind Ooredoo’s acquisition strategy in the early years
Sell: We saw a lot of opportunities in neighbouring emerging markets.
We all remember how exciting it was back in 2005-06 and we knew that our neighbours in the region, or the Europeans or the big Far East Asian companies or the Americans would one day come to the Gulf and start to buying up the operators and this has now happened, we compete with Vodafone in Qatar.
Had we not expanded, had we not transferred the knowledge into our group and prepared ourselves, I think we would be in a very difficult place right now. That was the reason behind it.
So that’s what we did. We went and bought into a ton of places. Mostly it’s gone well. Some haven’t been as successful as others but we are very pleased with our North African footprint.
We would have liked to have had Maroc Telecom, we pulled out of the race earlier this year for a variety of reasons.
We have done okay in the Gulf, we would have liked to have had Egypt, Saudi Arabia but we decided not to pursue those licences because we saw that the prices were too high, so we kept our financial discipline over things we really wanted. And it is South East Asia where we really took the plunge.
We took a minority stake and then we stepped up to majority principally in Indonesia and more recently in Myanmar
CommsMEA: How has the deal landscape changed in terms of opportunities in recent years?
Sell: It was great back in 2008-9. It was relatively cheap and there were plenty of opportunities but over the last year and half, it has started to get crazy again. There are limited targets. There aren’t that many places we can go any more.
There are maybe 30 [potential targets] that we look at every month, to check if there is any movement at all.