Telecoms Sector
M&A Insights
Are you prepared for lift-off in 2010?
Several mega-deals were announced in the last quarter of 2009 and others are in the
pipeline, putting pressure on companies without any deals in sight.
Stay ahead.
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Welcome
Welcome to the fourth edition
of Telecoms M&A Insights from
PricewaterhouseCoopers (PwC).
Here we explore the impact of
the financial-market downturn on
telecommunications transactions
in 2009 and look at some of the
key trends set to shape 2010 and
beyond.
Despite its reputation as a recessionproof industry, M&A activity in the telecommunications sector continued its
downward course in 2009 as telecoms
operators concentrated on reducing capital
expenditure (capex) and head counts. As
they were reluctant to spend cash on larger
acquisitions, total deal volume fell 10% to
365 deals in Europe, the Middle East and
Africa (EMEA). Driven by lower deal volumes
and a lower share of deals with a disclosed
transaction value, deal value in 2009
decreased by 55% to some €22.7 billion.
Germany was no exception to the overall
development in the EMEA region. In 2009 a
total of 31 telecoms deals involved German
companies as either a target or an acquirer.
This equates to a drop of 23% compared
to 2008. Nevertheless, the total disclosed
deal value remained nearly constant at €5.7
billion. As in previous years, Germany did
see mega-deals that drove disclosed deal
value. However, smaller deals by corporate
buyers and sellers dominated the market.
Market saturation and intense competition
have shaped the telecoms sector in recent
years. Broadband and mobile data use were
the only areas with promising growth. Yet
average revenue per user has already come
under pressure, and with steadily increasing
data use and a higher demand for capacity,
2 Telecoms Sector – M&A Insights 2010
additional investments are due in both the
fixed-line and mobile sectors. Consolidation
is a natural consequence.
With cash saved last year, telecoms
operators are in good shape to strengthen
their cross-media services and drive
consolidation within the sector. Last year,
deals were more likely to be initiated
by large operators, as financial markets
constrained deal activities for financial
buyers. Only three of the major telecoms
transactions in 2009 were backed by
financial investors, and we expect
cash-rich corporate buyers – mostly
European telecoms incumbents and large
conglomerates – to dominate deal activity in
2010 as well.
The PwC Telecoms team has actively
supported clients in securing and
positioning their businesses to develop their
strategy and business models.
One of our continuing objectives is to
maintain a dialogue and build on our
relationships with companies throughout
the telecoms sector. We hope that this
publication will help facilitate this and look
forward to receiving your feedback.
If you would like any further
information or have comments,
please do not hesitate to contact
us.
Werner Ballhaus
TMT Sector Leader
Transactions
Phone: +49 211 981 5848
E-mail: werner.ballhaus@de.pwc.com
Dr. Arno Wilfert
Strategy
Phone: +49 69 9585 6289
E-mail: arno.wilfert@de.pwc.com
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Telecoms investments outperformed other sectors despite
turbulent markets
With the benefit of hindsight, we can say
that the telecoms sector proved quite
resilient to the global downturn and is in
good shape to expand its position in the
aftermath of the recession.
120%
100 %
80%
60%
40%
20%
„ DOW JONES EURO STOXX Telecom Index
01/10
10/09
07/09
04/09
01/09
10/08
07/08
04/08
0%
01/08
Notable examples are France Télécom,
which has a long history of investment
in Africa, and Telenor of Norway, whose
investment portfolio includes operators in
India and Bangladesh.
were down some 30%, compared with
nearly 60% in other sectors.
European Telecoms stocks performance 2007–2009
10/07
Debt roll-over benefited from low market
interest rates, as well as lower risk
premiums than in other industries. Hence,
telecoms operators were able to service
debt throughout the downturn and even
renewed and extended debt. Furthermore,
since consumers do not normally cut telecommunications services even in bad times,
telecoms companies managed to generate
stable earnings and cash flows. Added to this,
West European telecoms companies have
actively sought out segments to off-set lower
growth in their core markets (for example,
investing in companies in higher-growth areas
like the Middle East, Africa and Asia).
Despite the stock market crash of 2008–
2009, investors in West European telecoms
companies recovered – not surprisingly
– almost 80% of their investment from
three years ago, while companies in other
sectors could hardly recover 70% of their
initial investments. When the stock market
bottomed in March, telecoms investors
07/07
Amid the near-collapse of the financial
system in 2008–2009, there was a lot of
head-scratching about how this event
would impact deal-making activities overall.
Telecoms’ reputation as a defensive sector
was reaffirmed through most of 2009 as share
prices held up well – despite the fact that
many operators had to service large amounts
of debt due to past heavy investments in
infrastructure and M&A activities.
04/07
Capital markets suffered throughout
2008 and 2009. Yet both fixed-line
and mobile stocks have held up
well, affirming telecoms’ status as
a relatively defensive investment in
recessionary times.
„ DOW JONES STOXX 50 Index
This chart shows the development of the DJ Euro Stoxx Telecom Index relative to the DJ Euro Stoxx 50 Index. Both are rebased to 100 as
of January 2007.
Source: STOXX Ltd
Telecoms Sector – M&A Insights 2010 3
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2009 telecoms deal volume in EMEA fell below its level
of 2004
EMEA telecoms deals per target region
in 2009
Africa 17
Americas 24
ESAT
17%
Asia 14
Australia 3
Western
Europe
185
S/W and
IT
70%
CEE 113
Middle-East 9
Source: Thomson Reuters, Mergermarket
4 Telecoms Sector – M&A Insights 2010
Despite relatively positive investment
performance, telecoms deal activity in
EMEA countries could not rebound from
the near collapse of the financial system.
In 2009, overall telecoms deal value
and volume in EMEA countries declined
noticeably. Deal volume decreased by 10%
from 406 to 365 deals, and disclosed deal
value fell by 55% to some €22.7 billion.
While total deal value was down significantly
from previous years, it is worth noting
that our analysis focuses on transactions
with disclosed deal values only. The large
number of deals with an undisclosed
deal value (not included in our published
numbers) may be explained by a high
involvement of non-public companies
not required to disclose deal-related
information and investors wanting to avoid
disappointing sales volumes.
2009 saw a few deals with a transaction
value of more than €1 billion. However, the
market was dominated by smaller deals
with a value of less than €100m.
European telecoms operators concentrated
on deals within EMEA, notably in West,
Central and East European countries, and
selected operators diversified their lowgrowth business at home by extending
into regions like Africa. However, telecoms
deal volume in Africa decreased by 6%
compared to 2008. With a total number of
EMEA telecoms deals per acquirer region
500
Deal Volumes
Telecoms deals in 2009 cannot
compete with previous years
in terms of total disclosed deal
value. Disclosed deal value was
also adversely affected by a much
lower number of deals where
the value of the transaction was
actually disclosed.
400
300
200
100
0
2004
2005
„ Africa
2006
„ CEE
2007
„ Middle-East
2008
2009
„ Western Europe
Source: Thomson Reuters, Mergermarket
17 deals, deal activity is still small given the
size of the area.
The most active region was southern Africa,
which saw ownership changes at the local
mobile network operator Vodacom. Other
large deals took place in Morocco, where
Zain of Kuwait bought a 31% stake in Wana
Telecom for some €240m, and Mali, where
Maroc Telecom bought a 51% stake in
Mali’s incumbent operator Sotelma valued
at €240.5m.
For EMEA telecoms operators, the most
attractive region outside EMEA was the
Americas, with a total of 24 deals in 2009.
Deal activity there was positively influenced
by the bankruptcy filing of Nortel Networks
and the subsequent sales of its different
business divisions, such as Ericsson’s
acquisition of Nortel Network’s CDMA
business and LTE assets for €933m or
Radware Ltd. Israel’s investment in Nortel’s
Application Switches unit.
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Deal momentum in Russia is likely to be sustained
beyond 2010
Among EMEA countries, deal
volume was highest in Russia. Deal
activity rose by 68% in 2009 over
2008. The Russian government
took an active part in the largest
deals.
The strongest growing region for telecoms
deals within EMEA was Central and Eastern
Europe (CEE), where deal volume increased
by 22% compared to 2008. As East
European countries like Romania, Hungary
or Bulgaria reached saturation, the focus
has shifted to countries where markets are
less developed and the population is still
growing.
Deal activity was highest in the Russian
Federation, where 79 deals were conducted
in 2009 – an increase of 68% over the
previous year. Russia saw some of the
largest telecoms transactions, such as the
acquisition of a 30% stake in Rostelecom
by the Russian Deposit Insurance Agency
and the Russian development bank,
Vnesheconombank, for €1.5 billion.
Furthermore, the Russian government took
an active role by acquiring a 20% stake in
the Indian mobile network Sistema Shyam
TeleServices Ltd for €530m. The deal is
part of India's debt settlement scheme with
Russia.
While most of the transactions were
concerned with telecoms services, some
40% of the deals completed in the Russian
Federation involved investments in related
and unrelated industries, such as telecoms
equipment or even oil. For example, the
Russian conglomerate Sistema, which has
a large telecoms division, was also heavily
engaged in several oil-related transactions.
EMEA deals 2009
Top 10 target countries
Country
No of deals
Russian Fed
79
United Kingdom
34
Germany
21
France
19
Denmark
17
Italy
15
Sweden
14
Poland
12
United States
12
Spain
11
telecommunications infrastructure is just
evolving, we expect deal activity to intensify
and attract foreign investment by corporate
and financial investors.
Source: Thomson Reuters, Mergermarket
In terms of telecoms deals, the Russian
mobile operator MTS was the most active
company within the country in concentrating
on increasing its share in telecoms services.
We expect the momentum in Russia to
last beyond 2010, as Russian telecoms
operators are likely to continue their
expansion at home and in other
Commonwealth of Independent States (CIS)
countries. Moscow is especially likely to
play a pivotal role in deals in other parts of
Eastern Europe in the next years. As CIS
countries are in stages of development
similar to African countries, where
Telecoms Sector – M&A Insights 2010 5
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Corporate beat financial investors in EMEA telecoms deals
Among the major telecoms deals
of 2009, only three were backed
primarily by financial investors. All
other major deals were driven by
corporate investors, mostly the
largest European incumbents.
The lack of debt financing created a
significant barrier to M&A activity for
financial investors in 2008 and 2009. Of
the 365 deals last year, only some 64 were
backed by financial investors, a share of
17.5%. Corporate investors, particularly the
incumbents in Western Europe, managed
to increase their deal activity thanks to
available cash flows and bond financing.
With the exception of Russian deals,
telecoms activity last year was shaped
by established West European operators
seeking growth opportunities outside their
home territory. For example, Vodafone
increased its investment in South Africa’s
Vodacom, Telenor acquired a majority share
of India’s mobile operator Unitech Wireless
(renamed Uninor in September), and
Deutsche Telekom continued its expansion
in Greece. However, by far the largest deal
was the acquisition of Unitymedia by Liberty
Global. John Malone, founder of Liberty
Global, surprisingly revived his attempt to
enter the German TV market. In November
he bought out private equity investors BC
Partners and Apollo, which had initially
prepared Unitymedia for an IPO in 2010.
Major telecoms deals in EMEA in 2009
Date
Value (€m)
Target
Target country
Acquirer
Nov 09*
3,500
Unitymedia GmbH
Germany
Liberty Global Inc
USA
Nov 09
2,974
GVT (Holding) SA
Brazil
Vivendi SA
France
Mar 09
2,788
Vodacom Group Ltd (35%)
South Africa
Telkom SA Ltd (controlled by
Vodafone Group Plc)
South Africa
Mar 09
1,657
Vodacom Group Ltd (15%)
South Africa
Vodafone Group Plc
UK
Mar 09
1,513
Rostelecom (30%)
Russian Fed
ASV; Vnesheconombank
Russian Fed
Aug 09
1,412
Comstar United Telesystems
(50.91%)
Russian Fed
Mobile Telesystems
Russian Fed
Apr 09
1,374
France Telecom España SA (18.2%)
Spain
France Télécom SA
France
Mar 09
949
Unitech Wireless Ltd (67.25%)
India
Telenor ASA
Norway
Nov 09*
900
HanseNet GmbH
Germany
Telefónica SA
Spain
Mar 09
795
Nortel Networks (CDMA/LTE)
Canada
Ericsson AB
Sweden
Apr 09
674
Hellenic Telecoms Org OTE (5%)
Greece
Deutsche Telekom AG
Germany
Apr 09
530
Sistema Shyam TeleServices (20%)
India
Government of Russia
Russian Fed
*Note: closed January 2010
Source: Thomson Reuters, Mergermarket
6 Telecoms Sector – M&A Insights 2010
Acquirer country
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Consolidation of the fixed-line market shaped German deal
activity in 2009
The consolidation of Germany’s
fixed-lined market continued in
2009. A total of 31 telecoms deals
involved German companies as
either a target or an acquirer – a
drop of 23% from the 42 deals of
2008.
Notwithstanding Liberty’s €3.5 billion deal
to buy Unitymedia and Telefónica’s €900m
acquisition of Telecom Italia’s German fixedline operator HanseNet – both announced
in the fourth quarter of 2009 and completed
in January 2010 – German deal activity
followed the global trend. Deal activity in
2009 was limited, and smaller transactions
prevailed. The slight increase in deal value
to €5.7 billion, driven mainly by Telefónica
and Liberty, deceives actual market
conditions.
The largest completed deal was the
acquisition by Deutsche Telekom of an
additional 5% of Greek telecoms incumbent
OTE for some €674m.
With high cash flows, corporate investors
were able to get more favourable deal terms
than during the peak years of the past. This
was particularly apparent in the market for
fixed-line broadband services. Freenet’s
DSL business was estimated to sell for
€300m–400m when it started the sales
process in 2008. It eventually sold the
business last spring for €125m to United
Internet. Telefónica took advantage of the
lengthy sales process for HanseNet, which
was eventually sold with a price discount of
some €100m.
The other large deal of 2009 was the sale
of Freenet’s web-hosting business Strato
to Deutsche Telekom – a transaction that
was highly competitive, with several private
equity funds courting the target as well.
Major telecoms deals in Germany in 2009
Date
Value (€m)
Target
Target country
Acquirer
Acquirer country
Nov 09*
3,500
Unitymedia GmbH
Germany
Liberty Global Inc
USA
Nov 09*
900
HanseNet GmbH
Germany
Telefónica SA
Spain
Apr 09
674
Hellenic Telecoms Org OTE (5%)
Greece
Deutsche Telekom AG
Germany
Nov 09
270
Strato AG
Germany
Deutsche Telekom AG
Germany
May 09
125
Freenet DSL
Germany
United Internet AG
Germany
Dec. 09
54.6
MSP Holding GmbH (50%)
Germany
Drillisch AG
Germany
Aug 09
50
Devas Multimedia PvT (17%)
India
Deutsche Telekom AG
Germany
Nov 09
36.8
Net mobile AG (84.7%)
Germany
DOCOMO Deutschland GmbH
Japan
Aug 09
26.7
Carlo Gavazzi Space SpA
Italy
OHB Technology AG
Germany
Sep 09
20
EXDS Inc Data Center Frankfurt
Germany
Equinix Inc
US
*Note: closed January 2010
Source: Thomson Reuters, Mergermarket
Telecoms Sector – M&A Insights 2010 7
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Capex saving and further consolidation will shape the
German telecoms market next year
A majority of deals was completed
in Germany. But given the maturity
of the German market, investors
increasingly need to look outside
Germany for attractive targets.
While consolidation has already shaped
German deal activity, we expect this trend
to continue throughout 2010. Fuelled
by intense competition from cable TV
operators, there will be further consolidation
among the larger fixed-line operators, DSL
and cable TV operators, and city carriers.
Compared to its West European
counterparts, the German fixed broadband
market is highly fragmented, with city
carriers dominating regional markets but
frequently lacking economies of scale,
regional and local cable operators offering
broadband internet access in addition to TV
services, and large integrated operators like,
Vodafone, Deutsche Telekom and Telefónica
O2.
We do not expect all major cable operators
to merge into a nationwide cable company
in the near future for antitrust reasons.
However, in the wake of the Unitymedia
acquisition, we do expect to see more
ownership changes at Germany’s largest
cable network operators. We also expect
more network layer 4 operators to be
bought by network layer 3 operators in
order to obtain direct access to customers.
In the mobile sector, we expect
consolidation among service providers and
potentially even some among the smaller
network operators if they fail to gain a
foothold in the upcoming spectrum auction.
8 Telecoms Sector – M&A Insights 2010
With the German market reaching maturity,
we should also see more capex-avoiding,
network-sharing deals in the future. As
in other countries in Europe, German
operators have to increase capex both in
fixed-line infrastructure due to fibre roll-outs
and in mobile operations as new spectrum
is auctioned in spring.
Operators in other countries, like
Switzerland and the UK, have already taken
steps towards bundling their networks.
In September, Orange and T-Mobile
announced plans for a joint venture in
the UK hoping to create synergies worth
€4 billion. Furthermore, Orange and TDC
agreed to merge their subsidiaries in
Switzerland, with France Télécom paying
€1.5 billion for a 75% stake in the new
company. The operators expect to generate
synergies of €2.1 billion, largely from
consolidating their networks.
While local competition authorities watch
these steps carefully, the German regulatory
agencies have signaled a more lenient
approach towards network pooling.
The need for fast roll-outs of high-speed
services and the early introduction of
innovative products has driven cooperations
on fibre roll-outs, and we expect to see a
more progressive step towards network
sharing with mobile operators as well.
As margins from core business decline and
large goodwill entries on balance sheets are
scrutinised, operators are rethinking their
investment strategies. We look ahead to
further divestures in non-core investments.
On the other hand, we should see intense
deal activity involving content services as
competition between telecoms companies
and cable operators grows and telecoms
operators try to gain a foothold in services
beyond network access and voice.
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EMEA outlook: increased deal activity in high-growth
countries
Fixed-line and mobile markets
are increasingly consolidated in
Western Europe. M&A activity is
likely to be driven by higher-growth
markets like CEE and Africa.
European incumbents are likely to
strengthen their portfolios in these
regions.
While deal activity in Germany should be
driven by consolidation to achieve synergies
in costs, revenues and investments, we
expect to see more deals in EMEA, with a
focus on targets in emerging markets.
Corporate buyers should dominate M&A
in EMEA countries. However, financial
buyers may selectively execute deals as the
leveraged lending market sees some easing.
Attractive assets are likely to be located
in higher-growth regions like CEE, the
Middle East and Africa, where corporate
markets are just developing. South Africa
is of particular interest as infrastructure has
been upgraded ahead of the football World
Cup and demand for telecoms services is
still growing. Added to this is a more open
regulatory environment allowing foreign
ownership and a clear legal framework
that reduces legal uncertainty and makes
investments more interesting.
The Middle East should itself continue to
benefit as it is a high-growth area, not to
mention home to telecoms operators that
are cash-rich and have already started to
expand their business to Africa and Asia.
In addition to investing in growth regions,
telecoms operators are likely to branch out
in other lines of services. West European
operators have already successfully
implemented systems integration and
outsourcing divisions to generate ancillary
business. This has proven successful
because systems integration has
become more and more about systems
communications integration, whereby
communications equipment is at the core of
the service. Similarly, outsourcing focuses
mostly on IT systems and communications
networks. Higher economies of scale are
achieved when operations are centralised
among several operators.
Finally, M&A activity will be driven by
the acquisition of content assets. While
telecoms operators provided the distribution
network for media and internet assets in
the past, operators now acknowledge the
importance of media content for growth
beyond pure data provision, since additional
value creation takes place with content and
advertising. Hence, telecoms operators
started to offer IPTV services to compete
with cable TV operators and have been
buying internet assets to capture a higher
audience share to in turn benefit from
growing advertising revenues.
We expect this convergence-driven trend to
continue, yet we are cautious as to whether
such deals generate the expected returns.
Despite a more optimistic outlook than last
year, wider economic uncertainty remains
and might constrain larger deals in the short
term. Nevertheless, rumors of two viable
mega-deals have already made it to the
press: the potential takeover of Telecom
Italia by Telefónica and KDG’s IPO.
Methodology
The Telecoms M&A Insights for EMEA
countries includes deals where the target
or the acquirer was in fixed-line telecoms,
or was a cable network operator, mobile/
satellite telecoms carrier or hardware
manufacturer for voice/data/satellite
communications and cable equipment.
The analysis focuses on transactions with
disclosed deal values only.
Telecoms Sector – M&A Insights 2010 9
Contacts
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For further information, except for US residents enquiring about corporate finance-related services, please contact
Germany
Werner Ballhaus
Dr. Arno Wilfert
Philip Grindley
Michael Hartmann
Eckhard Späth
Frank Mackenroth
+49 211 981 5848
+49 69 9585 6289
+49 69 9585 3191
+49 89 5790 6372
+49 89 5790 6415
+49 40 6378 1309
werner.ballhaus@de.pwc.com
arno.wilfert@de.pwc.com
philip.grindley@de.pwc.com
michael.hartmann@de.pwc.com
eckhard.spaeth@de.pwc.com
frank.mackenroth@de.pwc.com
UK
Andy Morgan
Matthew Cross
+44 118 938 3191
+44 207 213 4485
morgan.andy@uk.pwc.com
matthew.cross@uk.pwc.com
France
Spain
Italy
Sweden
Netherlands
Denmark
Belgium
Switzerland
Noël Albertus
Julian Brown
Marco Tanzi Marlotti
Johan Rosenberg
Andries Mak van Waay
Michael Eriksen
Frederic van Hoorebeke
Philipp Hofstetter
+33 1 56 57 85 07
+34 91 568 4405
+39 02 80 646 330
+46 8 5553 3552
+31 20 568 6509
+45 39 45 92 71
+32 2 710 4115
+41 1 630 1506
noel.albertus@fr.pwc.com
julian.brown@es.pwc.com
marco.tanzi.marlotti@it.pwc.com
johan.rosenberg@se.pwc.com
andries.mak.van.waay@nl.pwc.com
michael.eriksen@dk.pwc.com
frederic.van.hoorebeke@be.pwc.com
philipp.hofstetter@ch.pwc.com
For US residents requiring information on corporate finance-related services, please contact our FINRA-registered broker-dealer in the US, PricewaterhouseCoopers Corporate Finance
LLC, at:
US
Rakesh Kotecha
+1 312 298 2895
rakesh.r.kotecha@us.pwc.com
For more information visit our website at:
www.pwc.de/de/tmt
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