It’s a sure-fire sign that credit markets are moving again when rumours of big M&A deals start ramping up. This has certainly been evident in the mobile space over the last month or so.
To name a few, there’s Orascom being linked with Bougyues, T-Mobile USA with Clearwire, among others, in the US, and – the biggest of the lot – Nokia being linked to an acquisition of smartphone rival Palm. And then there are the deals that have actually happened: France Telecom/Orange has followed its merger with T-Mobile in the UK with a similar tie-up with TDC’s Sunrise in Switzerland, and Telefonica has bumped up its presence in the German DSL market via the acquisition of Telecom Italia’s Hansenet. Operator IPOs have also been well received; Telenor’s Grameenphone successfully completed the largest IPO in Bangladesh, and Maxis – Malaysia’s largest mobile operator – also reported oversubscribed demand when it listed last month in Kuala Lumpur.
Google, meanwhile, recently made two mobile-related acquisitions in the space of a week, buying VoIP firm Gizmo5 to bump up its Google Voice offering, and mobile advertising platform, Admob. The latter – a US$750 million deal – was the third-largest acquisition in Google’s history.
It shouldn’t come as a surprise that investors are looking to telco stocks as a route out of the recent economic turmoil. Telcos may not deliver stellar returns but they make for a stable investment: they have real assets (the networks and towers) and very real customers (you and I). Denmark’s TDC is a good example. Acquired by a consortium known as the Nordic Telephone Company at the height of the 2005 private-equity boom, the EUR13 billion deal was one of the largest ever leveraged buy-outs seen in Europe at the time. And yet – even with the shockwaves of the economic crisis still being felt – the consortium is already eyeing an exit strategy.
So how is it that the mobile industry (a sector traditionally susceptible to dodgy investments) can be in rude financial health, while financial institutions that have existed for hundreds of years are floundering?
To understand this current situation fully, we must turn the clock back to the turn of the century and the dotcom boom (and bust). It was a time when tiny Internet start-ups with often suspect business plans were showered with cash from VC firms, and any teenager in California with a website could seemingly become a millionaire overnight. The mobile industry – buoyed by the immense possibilities of the as-yet-untested 3G market and always on the lookout to jump on a hype bandwagon – was involved in all this silliness.
Indeed, one of the key acquisitions of that era was Vodafone’s mammoth £112 billion acquisition of Germany’s Mannesmann in 2000, which still remains one of the largest corporate deals of all time. The fall-out from this deal took a long time. Vodafone was forced to write-down the value of the massively-overvalued asset (later to become Vodafone Germany) for many years, and investors wouldn’t touch a telecoms firm with the proverbial bargepoll for just as long. For Vodafone, the deal marked an end to a decade of expansive growth, which had seen the UK group expand around the world. There have been a few strategic acqusitions since then – most notably in Turkey and India – but nothing like the frenzy of the 1990s.
Significant M&A activity in the telecoms sector would not ramp up again for a few years, arguably not until the private-equity boom of 2005/06 (which saw telcos such as Denmark’s TDC snapped up by private investor groups). In the interim period, bean-counters at the likes of Vodafone had time to sort out their balance sheets and restore some credibility with shareholders. This meant that most telcos found themselves able to ride out the recent economic crisis relatively unscathed, with telecoms one of the few major industry sectors not to require government cash.
However, in order to maintain such healthy cash flow levels, many operators have been forced to take on debt or reign in capex. So with traditional operator revenue streams (and margins) likely to remain under pressure moving into 2010, the new investment currently pouring into the sector via M&A, IPOs and private-equity will play a critical role in funding major network upgrades and next-generation services.
Matt Ablott, Deputy Editor