The Telecom M&A wave - Consolidating or Insulating?

In the past two years, the global telecom sector has been swept by the massive M&A wave. Speaking numbers, the sector had already inked deals worth $250 bn by mid 2015, more than twice the size of deals in 2013. Mostly convergence and scale driven, this disrupted the player landscape as we knew even a year back. This article is an attempt to understand what really has been happening in the market and whether that can be called global in its truest self.

In Europe, large players such as BT and Liberty Global acquired complimentary capabilities, while Hutch and Sky consolidated operations across Europe. There were also a few bolt on deals such as Tesco's Blingbox being acquired by TalkTalk. Consolidation of this scale also meant that massive funds were required. Interestingly most players seemed to either raise equity or dispose non core assets and also wait for the right valuations than get into a debt trap. In that sense the wave also led to some market correction.

The US was not too far in terms of action. This market for long had been battling the saturation weight and cord cutting threat. Top players had swelled in size and coverage and no legroom seemed available. It is at this juncture that three important shifts happened. 1. Charter, previously a #3 acquired TWC and eventually Brighthouse to create a US cable behemoth. 2. Altice, the French telco entered the US markets with the Suddenlink deal and now is looking at Cox. 3. US telco investor John Malone woke up to the benefits of synergizing his US investments with Liberty Global, the European business. While these appear just scale driven consolations, the market impact was massive. US players found an outlet into Europe, a market so similar in terms of macro factors, yet comparatively lesser impacted by cord cutting, net neutrality and regulations. Content owners and distributors were still willing to go the 'Pay-TV' way. Similarly, the size gain by level 2 players meant the end of Comcast and TWC's market duopoly with pure play telcos such as AT&T and Verizon looking for intensely at the TV/content market.

Most of this activity seems restricted in the Western hemisphere with market analysts in that part of the world already commenting that the wave will subside soon since not too many opportunities remain. However, I still feel that a lot is yet to be tapped, particularly in Asia-Pacific. There is a huge opportunity for US and European players to leverage this part of the world - and currently no one is doing that, instead remaining satisfied and insulated in their own bubbles. In that sense the M&A wave is not really global.

1      Telcos from developed markets such as Telstra and SingTel are nearly the same in terms of market dynamics as say a Telefonica or Verizon. There is a huge opportunity to cross-leverage capabilities and try tapping complementary markets. The Western players get a whole new market to cover - a market that is still ARPU driven and churn intensive. The Asian players on the other hand will have access to subscribers who are willing to pay a premium for high speed data and not necessarily eroding the bottom line.

2      In other parts of Asia and Africa, telcos such as Airtel and Zain are surviving in a $5 ARPU environment and yet inking EBITDA margins of nearly 25-28%, comparable with any Western player. US and Europe's complete ignorance here is an imbalance. There is a good opportunity to leverage and to learn the $5 game, particularly as Western telcos battle saturating market on the home turf. There is also a space to explore how OTT content can be pushed on the newly formed data highways of emerging market telcos - content that consumes low bandwidth, is priced economically and yet looks at volume gain.

Needless to say most of them have come from my readings and thoughts from top of the head. Therefore, I do take the liberty of not quoting any source but just penning my observations.