Digital M&A and Investment Strategies – July 2017 update

M&A is a key tool in building digital businesses, but is the telco sector investing enough? We examine the key drivers and barriers to telco digital M&A strategies, comparing investment levels to other verticals, and compare and contrast M&A activity with our previous findings.

Introduction

Digital M&A as a telco strategy

In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.

Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.

As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:

1. Extending geographic footprint is a common trend, as many operator groups look to:
   • Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
   • Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
   • Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
2. Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
3. Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
   • Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
   • Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.

Contents:

• Executive Summary
• Evaluating operator digital investment strategies
• Key findings
• Recommendations
• Introduction
• Drivers for operator M&A and majority investment
• Evaluating operator digital investment strategies
• 22 players across 5 regions: US shows the most aggressive M&A activity
• Comparison with previous period (H1 2012 – H1 2016)
• European telcos remain largely focussed on Telco 1.0 M&A
• Which sectors are attracting the most interest?
• Telco M&A investment is falling behind other verticals
• What are the cultural challenges to digital M&A in the boardroom?
• Operator M&A Strategies in detail: Consolidation, content and technology
• M&A as a telco growth strategy
• Adapting telco culture to ensure digital M&A success
• Recommendations

Figures:

• Figure 1: Drivers for operator M&A and majority investment – traditional and digital
• Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
• Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
• Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
• Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
• Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
• Figure 7: Mapping of operator digital M&A strategies
• Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
• Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017

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