Prepare For the New Wave of Mega-mergers
By Steve Wallage, Wed Jun 23 15:45:00 GMT 2004
Operator mega-deals have gone away in the last two years as investors have worried about mountains of debt and the success of 3G. The time is ripe for a change.
At an M&A event last week, one of the speakers made a very interesting point about industry consolidation – it’s not about financials, it’s about sentiment. And the sentiment among the mobile operators is very much turning towards acquisition mode. Although investors are still wary of large deals, there are five clear reasons why sentiment is now moving towards more deals, and increasingly larger deals.
First, some of the acquisitions have been shown to work. Bankers usually estimate at least three-fourths of acquisitions “don’t work”, although this is obviously a very difficult thing to measure. Vodafone is often quoted as an example of the success of acquisitions with its efforts to extend brand, services and best working practices across its subsidiaries, but an operator like Orange has been more successful in developing an integrated approach. However, the best example is T-Mobile. After being harshly criticized for overpaying for US carrier VoiceStream, many of these same critics are now eating their words as the country is becoming the growth engine for the entire T-Mobile group. Perhaps most interesting is that T-Mobile has been able to use its European experience in areas such as number portability and data services to drive the growth of its US operations, making a great case for an acquirer being able to add value.
Second, the number of acquisitions has been quietly increasing. T-Mobile has paid $2.5 billion in cash to buy Cingular’s networks in California and Nevada. Deutsche Telekom said in March said it may spend up to €1.5 billion to add US spectrum in addition to its €7 billion budget this year for acquisitions, of which the main target is mobile stakes in Eastern Europe. Vodafone has spent $4.7bn in Japan, and Telefónica Móviles another $1 billion on CTC's wireless assets in Chile.
Third, the Western operators need new growth markets. There is the familiar scenario of the developed mobile markets showing tiny growth. There is the frightening scenario where the mobile markets start to look mature and other markets follow the Danish example, where the established operators are mercilessly attacked by discount and Web-based operators. Even in France, Debitel has set up as an MVNO and the Industry Minister has plans for a further two virtual operators. As Strand Consult puts it, will the mobile industry go the same way as the airline industry, and can someone like Tele2 become an Easyjet or JetBlue?
Four, if there was ever doubt, it is clear that alliances and, generally, minority stakes do not work. The loose alliances between European operators to combat the strength of the Vodafone brand have proved impotent. Minority stakes have always been difficult as evidenced by the desperate desire of Vodafone to gain full ownership of its affiliates, or the disposal of the Orange investment in Thailand.
Fifth, and most interestingly, is the change in environment. At least three merger attempts between European incumbent operators were quashed by the EC and national governments – most famously, Deutsche Telekom and Telecom Italia. The mood is now changing after the success of TeliaSonera and non-telecom deals such as Air France and KLM. The reasons are varied, including a greater sense that these are competitive markets, reduced government stakes, the sense that greater competition is good and the precedent of other deals. Of course, any such mega-merger would still be subject to intense scrutiny and be burdened with conditions, but is now far more likely to get final approval.
Two examples of changing sentiment are mmO2 and Denmark’s TDC. After escaping the clutches of KPN, mmO2 did not use the occasion to say that this enabled it to concentrate on its future as an independent company or focus on core businesses. The company was widely quoted as saying it wanted to start making acquisitions of its own. Or take TDC. After years of fighting overtures from Telia, its Chief Executive has been quoted as saying he would be open to a deal with TeliaSonera. Any such deal could lead to Telenor looking for a larger partner and a domino effect of acquisitions across Europe.
The summer months are not the best for M&A activity as too many people are on vacation, but expect the pace of deals to really accelerate come September and October. The smaller acquisitions will be the starting point, with Eastern Europe, buoyed by the EU accession countries, and Russia the key target. Although many of the operators have been burnt in acquisitions in Asia, they equally see this as the route to growth. The focus will be increasingly on the larger countries. As the handset vendors now tend to focus much of their attention on China and India, expect the mobile operators to fall suit. But come 2005, there is likely to be a number of deals in Europe, and the next wave of consolidation in the US market.