The telecoms industry is poised for a resurgence after a period of decline over the past year, says Jonny Parkinson, managing partner at Marktlink. Due to geo-political tension, higher interest rates, inflation, supply chain disruption, and regulation, telecoms suffered a 52% drop in dealmaking and a 40% drop in deal values in 2022. However, demand for communication technology isn’t going anywhere and digital infrastructure is somewhat recession-resistant digitisation remains a permanent fixture in the economy.
The telecoms, media and technology (TMT) sector continues to dominate the global deals market, accounting for approximately one-quarter of deal volume in 2022. As such, the near future of telecoms dealmaking looks cautiously optimistic. We’re likely to see a rise in dealmaking to respond to dynamic markets, and more structural shifts within the telecoms sector internationally.
Taking advantage of the great delayering
The telecoms industry is undergoing a significant transformation as the traditional, vertically-integrated carrier model undergoes a ‘great delayering’.
Despite an overall decline, this has led to a surge in infrastructure deals, making up about 55% of global telecom deal value and 91% of total deal value in the third quarter of 2022 alone. Notable deals include Brookfield Asset Management and US private equity group DigitalBridge’s purchase of Deutsche Telekom’s GD Towers for US$10.7 billion (€9.75 billion), and AustralianSuper and Australia Tower Network’s acquisition of Axiom for $2.86 billion (€2.61 billion).
Despite the rising cost of debt, we can expect more data centre deals, tower company deals, and other digital infrastructure deals in the near future, driven by government support, higher quality tower assets, and long-term demand trends one of these trends being a move towards greener infrastructure.
This drive will see new opportunities arising worldwide, ranging from new investments and gaps in the market. As ESG (environmental, social and corporate governance) becomes a core focus for businesses across the board, companies may seek to expand into greener markets, or take on assets that align with a shift in values and the direction of the industry, divesting those that don’t.
This, combined with the selling off of infrastructure from debt-laden companies, means a rapidly changing and competitive environment, where business owners need resilient deal-making capabilities in place to thrive.
Leverage the competitive environment
Telecoms is experiencing a period of consolidation, as companies merge to gain a larger market share and leverage synergies. For smaller players, innovation is the prized asset the most companies offering the latest technological solutions are often picked off, as acquirers seek to leverage these innovative technologies to retain their own competitive advantage.
To secure the best possible deal in this environment, business leaders should consider running the deal process as an auction, involving multiple bidders to increase the acquisition price and secure better deal terms.
Telecoms companies should be flexible and creative in structuring their merger and acquisition (M&A) deals, exploring different financing options such as equity swaps, asset swaps, or joint ventures, and considering different deal types such as carve-outs, spin-offs or alliances. The increased cost of debt and regulatory constraints make it crucial for telecoms companies to be adaptable in their approach to M&A.
While 5G will undoubtedly bring progress, it hasn’t changed the game as much as anticipated. Operators will still face stiff competition from other technologies such as Wi-Fi 6, satellite broadband and OTT providers. In 2023, telecom companies will need to differentiate their 5G offerings by providing superior customer experience, value-added services, and tailored solutions for different segments and verticals all of which can be aided by artificial intelligence.
Cloud computing will hit primetime in 2023, enabling telecom operators to reduce their operational costs, improve their scalability and flexibility, and enhance their service delivery and innovation. Telecoms operators will pivot towards higher-growth revenue streams through capability-driven M&A, with data analytics, cybersecurity, and cloud segments considered strong candidates for activity.
As major players in the sector look to strengthen their assets, businesses which can provide them with the opportunity to do so are in a good place to negotiate a successful deal. With the right processes and support mechanisms in place, the competitive environment provides an abundance of opportunities for telecoms entrepreneurs.
Prioritise the vision
With bigger players consolidating the market and absorbing smaller companies for their technology, we are often seeing businesses converging into different sectors.
This is also comparable to the less strictly regulated markets of Latin America, Africa, and Asia, where companies are crossing borders to build and focus on the regions’ mobile and broadband services. Cross-border deals, such as Vodafone’s acquisition of Liberty Global’s operations in Germany and Central Europe, have played a huge part in recent M&A activity. Another trend shaping the M&A landscape is the rise of disaggregated and focused business models, with operators specialising in specific niches, which can create the opportunity for cross-border M&A.
For M&A activity in this realm, businesses must consider how acquisitions align with their existing portfolio and vision for the future. Acquiring a business in a different sector or country could result in less natural synergies, so it’s essential to plan for integration challenges such as cultural differences, operational complexities, and customer retention. Successful integration is often the key determinant of M&A success or failure. With the rapid changes in the telecoms sector, companies must carefully plan, monitor and frequently review assets to ensure vision alignment to achieve their strategic goals.
Expect due diligence
In 2022, private investments continued to dominate telecoms across all deal types in 2022, as evidenced by CVC Capital Partners’ proposal for 49% of Telecom Italia’s new enterprise services unit, and Carlyle Group’s $1 billion (€0.91 billion) partnership with Tillman Global Holdings to expand its independent cell tower company.
However, not all M&A deals end in success. Telecoms operators must exercise caution when selecting targets, paying the right price, managing integration, and anticipating potential disruption or regulatory barriers. As such, extensive due diligence is crucial to ensure that buyers know what they’re buying, the obligations that will be assumed and any associated risks. Sellers must prepare for scrutiny and be on hand to satisfy the buyer’s processes.
To be well-prepared, sellers should anticipate and rectify any issues that may arise during the process as quickly as possible. They must ensure that financial statements are accurate, projections are defensible, and all required documents can be delivered quickly and efficiently. Often, an online data room is set up to house all the necessary information. This process can be a time-consuming and resource-intensive, so it’s crucial to strike a balance between upholding the interests of the company and responding to due diligence requests.
When navigating the complex landscape of mergers and acquisitions in telecoms, seeking the guidance of a specialised M&A adviser is crucial for achieving a successful outcome. By enlisting the support of an adviser with extensive experience in the sector, entrepreneurs can tap into their vast network of potential buyers and sellers and benefit from their expertise in navigating the intricacies of a telecoms deal.Jonny ParkinsonWhen navigating the complex landscape of mergers and acquisitions in telecoms, seeking the guidance of a specialised M&A adviser is crucial for achieving a successful outcome. By enlisting the support of an adviser with extensive experience in the sector, entrepreneurs can tap into their vast network of potential buyers and sellers and benefit from their expertise in navigating the intricacies of a telecoms deal.
The author is Jonny Parkinson, managing partner at Marktlink.
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