M&A and majority investment are key tools in building digital businesses. But are telcos actively investing? We look in detail at SingTel, Telstra and Verizon, which have committed significantly to digital investment to extend their businesses. We also discuss why most European operators lag their Asia-Pac and North American peers. Our analysis is based on the newly-developed STL Partners Digital Investment Database, which tracks investments by 22 leading service providers.
Communications services providers have long used M&A as a key element of strategy. By far the most common approach has been to acquire other operators to build scale in core communications services. For the vendor operator, selling off assets has been as a way of raising cash to reduce debt or enable further investment in core markets. As telecommunications growth has slowed and technological developments and user behaviour have swung towards mobile, so M&A activity has increased as players have strived for market consolidation, integration of fixed-mobile capabilities, or geographic expansion as a source of growth. BT-EE in the UK, Orange-Jazztel in Spain, and Etisalat-Maroc Telecom provide respective examples.
However, as operators continue to build digital capabilities and strive to deliver digital services, M&A and investment beyond ‘traditional telecoms’ is picking up. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one that focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation rather than continuity. For more details, see our recent report Solution: Transforming to the Telco Cloud Service Provider (Part 2). Making such a change is not without its challenges, and many operators now see M&A and investments as an important part of the Telco 2.0/digital transformation journey.
This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of SingTel, Telstra and Verizon. There is an accompanying database with key digital acquisitions and investments for twenty-two operators during the period 2012 – 1H 2016 inclusive.
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 above, drivers that refer to ‘traditional’ or ‘Telco 1.0’ M&A and investment are well-established:
1. Extending geographic footprint is often a key driver…
- …to new markets that are adjacent geographically (e.g., DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
- …or to those that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
- …or 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, in order to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the U.K. is one example.
3. Consolidation has slowed to some extent, as regulators and competitors fight against 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 (E.U.), where E.U. regulators have refused to approve several proposed telecoms M&A deals recently, including TeliaSonera and Telenor in Denmark, and the proposed Hutchison acquisition of O2 to merge with its subsidiary Three, in the UK. 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 successful examples including TeliaSonera’s acquisition of Tele2 Norway in 2015.
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. For the purpose of our analysis, we are counting the SI and consulting M&A activity as ‘digital/Telco 2.0’ rather than ‘traditional/Telco 1.0’, where it focuses on a specific digital area (e.g., cloud services, analytics).
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:
- TeliaSonera’s pullback from its Eurasian markets has seen it sell off a 60% stake in Nepalese operator Ncell to Axiata, and it is also planning to divest its majority stake in Kazakhstan’s Kcell through a sale to Turkcell.
- Telefonica’s attempt to sell its O2 UK unit to Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its large debt (at EUR 49.7m as of January 2016, the company’s debts actually exceeded its market value) and to fund its ambitions to build out its media empire.
- Executive Summary
- Drivers for operator M&A and majority investment
- Telco digital M&A constraints – why take the risk?
- Evaluating operator digital investment strategies
- 22 players across 5 regions: US and Asia most aggressive
- Which sectors are attracting the most interest?
- Operator M&A strategies in detail: SingTel, Telstra and Verizon
- SingTel: focusing on digital marketing, media and security
- Telstra: Spreading Its Digital Bets across Health, Cloud and Video
- Verizon: acquisition to support digital advertising and media dominance
- Figure 1: Drivers for operator M&A and majority investment – traditional and digital
- Figure 2: Telco cost and operational models inhibit innovation and discourage investments in unfamiliar digital businesses
- Figure 3: Number of operator digital acquisitions and majority investments, 2012 – 1H2016
- Figure 4: Largest 10 telco digital M&A and majority investments, 2012 – 1H2016
- Figure 5: Mapping of operator digital M&A strategies
- Figure 6: Number of digital M&A and majority investments by sector/category 2012 – 1H2016
- Figure 7: SingTel – digital investment overview
- Figure 8: Amobee’s proposition focuses on cross-platform advertising and analytics
- Figure 9: Telstra’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016
- Figure 10: Ooyala’s proposition
- Figure 11: Cloud is the key element in Telstra’s Telco 2.0 strategy
- Figure 12: Verizon’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016