Dot com diet keeps telecoms in good shape

April 20, 2009 — The Telecoms mergers & acquisitions (M&A) market has recalled the lows of the early 2000s with deals values falling 95% over the last two years, a PricewaterhouseCoopers report, Telecoms M&A Insights 2009 , reveals.

Fuelled by deals such as AT&T/BellSouth, the acquisition of Viacom’s cable network business and Telefonica/O2, transaction values soared in 2006 to nearly €40 billion while volumes rose above the 100 mark. Even without this deal the spike resembled that of 2001 — the height of the dot com bubble.

However, after the highs of 2006, the following year saw an 85% decrease in volumes while the average deal in 2008 mirrored that of 2002 with €51 billion and €47 billion respectively.

Alexandr Ordinartsev, partner, technology, entertainment & media performance improvement services, PricewaterhouseCoopers, commented:

“Although in terms of deal activity the industry is seeing a return to the recent dark days, on the whole telecoms should stand up against the crippling headwind of the recession. The dotcom crash put the industry through its paces. As a result, telecoms companies emerged tougher, thanks to tighter balance sheets, and we should see far less distressed debt and insolvencies than in other sectors such as banking or retail.”

Telecoms’ reputation as a defensive sector was reaffirmed through most of 2008 as share prices and transactions volumes held up well. However, the year-on-year picture masks the impact of the sharp decline in conditions after September 2008, when transaction volumes plummeted, and the market for large telecom transactions effectively closed.

Around the world

2008 was the year that Central & Eastern Europe (CEE) finally took centre stage. The biggest transaction in Europe was VimpelComs’ €3 billion acquisition of Golden Telecom, and all of the top three deals that year involved either Greece or the Russian Federation.

However, despite the level of activity in this region, overall deal activity in Europe declined both in value and volume.

In North America, from a significant peak in 2006 (largely as a result of a handful of major deals including AT&T’s acquisition of BellSouth for €58 billion) the value declined substantially year-on-year, though deal volumes showed a more modest decline.

Though Asia Pacific (ASPAC) remains a region very much dominated by intra-region M&A — of the top 18 deals, all 18 were in-region and 8 were in-country — there is a conspicuous absence of data around the Chinese telecom market.

2007 was an outstanding year for Latin America which saw the single largest completed transaction of 2007 anywhere in the world with America Movil (Latin America’s largest mobile operator) paying €23 billion to acquire America Telecom in Mexico. Though 2008 saw the return to more normal levels, albeit impacted by the global year-on-year decline.

Middle East & Africa (MEA), which has shown strong growth over the past 5 years, looks set to continue to attract investment given its profile as a high-growth market. The region has the lowest number of telephone connections per capita of any region of the world so clearly has a high potential for growth. However, growth opportunities for the industry require funding and as resources for this become increasingly scarce, some small operators will struggle to survive which in turn will create opportunities for further consolidation in the marketplace.

2009 and Beyond

The lack of liquidity (particularly debt) will be a barrier to M&A activity across all sectors in 2009, but these cyclical issues are accentuated by some telecoms-specific issues.

Telecoms, as a large capital expenditure intensive industry, will always require a significant amount of debt. The industry was fortunate in 2008 in that the total amount of debt falling due was less than in previous years. However the longer term trend will reassert itself as €47 billion falls due in 2009 and with €180 billion falling due over the next four years.

The cost of debt has risen for even the largest cash rich companies, and as a consequence the industry will need to be particularly clear about its ability to service the debt. This communication may give rise to the possibility of negotiating new structures and transactions. Telecoms businesses may be forced to clarify their thinking around divesting loss-making operations or provide a partition of higher quality assets (such as its local loop of towers) to investors.

Wilfried Pototschnig, deputy head M&A Lead Advisory, PricewaterhouseCoopers in Russia, said:

“With the current downturn expected to continue for some while regardless of whether a telco was prepared, or not, for this financial storm, the markets will force movement in disposals and mergers. The magnitude of the debt refinancing problem will inevitably define the nature and scale of M&A opportunities in 2009 and beyond. This, in turn, will drive opportunities creating an environment in which the stronger operators could prosper.”

Notes to Editor:

1. For additional information, please contact Anna Kogosova, PR Assistant Manager.
2. For more information and to download a copy of the report visit: Telecom Insights 2009