• In the next era of telecom M&A, scale, scope and infrastructure deals will be key in helping companies shatter the value creation wall.
• New research from Bain & Company identifies the best ways telecom operators can use M&A strategies for future value creation
The telecom industry in many regions is struggling to grow. Customer penetration has reached a saturation point, and companies face an eroding topline, rising capital expenditures, and thus, declining valuations. Cable operators, for example, saw multiples drop by more than 20 percent and integrated operators by 7 percent since 2015. All of this comes at a time when telecom operators feel pressure to upgrade their existing infrastructure and roll out new 5G and fiber networks. One way to shatter the value creation wall is to take a more diversified view of M&A.
New research from Bain & Company, The New Age of Scale, Scope and Infrastructure in Telecom Mergers & Acquisitions, identifies the three ways telecom operators can win : 1. scale deals; 2. scope deals; and 3. infrastructure deals. However, they will need to think carefully about how to gain ground with these M&A strategies.
Many telcos are hitting the revenue growth wall at a time when they need additional cash to upgrade and roll out their networks, said Mathilde Haemmerlé, a partner in Bain’s Telecommunications practice and co-author of the study.
Traditional telecom M&A consisted largely of in-country consolidations to capture scale synergies, said Alex Dahlke, a partner in Bain’s Telecommunications and M&A practices. In the next era of telecom M&A, we expect both scope deals in particular to accelerate, which will enrich telecom companies’ portfolios beyond connectivity, and a rise in highly promising infrastructure deals. Our research identifies the best ways telecom operators can use these M&A strategies for future value creation.
Scale deals hold promise for helping telecom operators generate the highest levels of synergies. On average, Bain found that synergy net present value represents 60 percent of deal value for mobile-mobile deals and 45 percent for fixed-mobile deals. But scale deals are getting trickier than ever. Partly, it is a matter of numbers: as the industry consolidates, it leaves fewer and fewer acquisition candidates for scale deals, which tend to be in-country by nature. In recent years, regulatory and anti-trust authorities have also increased their scrutiny of larger deals, erecting higher hurdles for deal approval.
The time, expense and possible remedies to get scale deals approved is expected to rise, said Mr. Dahlke. Increased regulatory scrutiny raises the bar on due diligence and the depth of preparation needed for regulator filings and engagement. It also puts a premium on having a solid deal thesis that can help guide remedy preparation where needed and avoid losing value in that process.
Scope deals can help telecom operators expand in new areas near their core business, capitalizing on their existing assets and creating revenue synergies from cross-selling and higher customer loyalty. More companies will likely adopt this strategy to find a niche competitive edge or to build out verticals, with the primary goal of growing revenues and margins. Various avenues exist here, ranging from media and content to IT and services to cyber security, AI or sales channels.
Whichever route the telecom industry takes, it should follow the golden rule of aligning M&A strategy with corporate strategy. The company needs a clear picture of where it wants to go and how it can use M&A in a way that it can benefit from close adjacencies related to the core connectivity business. Although the transaction value of scope deals is much broader than that of scale acquisitions, they frequently tend to be quite asymmetrical (small) in size.
Infrastructure deals to spin off existing, build new, or combine their existing infrastructure with partners will allow telecom operators to create synergies from better infrastructure utilization and appeal to new investors interested in the more predictable cash flows of infrastructure units. Consider that tower and fiber company multiples on average were 3-4 times higher than mobile and integrated operators in 2016-2018. Still, as deal volumes ramp up telecom operators will need to become much more sophisticated in the ways they structure such deals to monetize their infrastructure units going forward.
Telecom operators will also need to become more thoughtful in which investor base they pursue – targeting pension funds, government funds, private equity, and infrastructure funds. There is no one-size-fits-all solution: the deal to monetize infrastructure needs to be tailored based both on the financial and strategic objectives, as well as on the assets the company is trying to monetize.
Choosing from the plethora of options across these three deal archetypes requires careful attention to timing. For example, a well-funded, growing market leader will need to explore very different options than its cash-strapped, network quality challenged rival, said Mr. Dahlke. While the situations differ for every company in every market, the telecom operators that do the best job of thoughtfully navigating the new age of scale, scope and infrastructure M&A to advance their strategy will be those that thrive as the market matures further.
