It is the territory inhabited by predators and white knights, by venture capitalists, vulture capitalists and bottom-feeders. And, in Europe as in the US, it's a fertile territory indeed. It's the wild world of mergers and acquisitions"&brkbar; and it is on the way back.
While not a perfect indicator of industry health, the signals being sent out by the recent rise in European M&As in telecoms are encouraging indeed. This is not just the result of the number and size of the transactions in question; it also relates to the range of strategic characteristics of the latest deals.
'Blockbuster deals tend to grab the headlines but, away from the limelight, the middle-market still accounts for the bulk of technology transactions - no less than 95% of deals last year were valued at less than $500 million,' says Andy Morgan, technology sector leader for corporate finance at PriceWaterhouseCoopers. Yet he notes that there were no fewer than 14 $1 billion plus technology transactions completed last year, compared with six in 2004.
Few corners of the industry have remained untouched by the European M&A revival. It's as likely in the Nordic market, Eastern and Southern Europe as in the major markets of Western Europe. The full scope of recent European M&A transactions is outlined in 'Done deals: five flavors of European M&A' (page 21).
It is when current activity is viewed in the context of recent telecoms history that the real positives emerge. Only those with the shortest of memories will fail to recall the last major wave of M&A deals. This built up steadily through the course of the 1990s before reaching a traumatic climax at the turn of the century. The merger mania in the dot-com years running up to the implosion of the telecoms and technology sectors was largely responsible for the calamity that followed.
The near insanity of that period, memorably described at the time by then US Federal Reserve chairman Alan Greenspan as 'irrational exuberance', so over-valued T&T stocks that when the market eventually realized what was going on, chaos followed. This applied as much to traditional telecoms players as to the more esoteric dot-coms themselves.
This certainly should give us pause when tempted to celebrate unreservedly the revival of M&A levels. Are we now headed down the same road that took us to such a painful destination just a few years ago‾
There are differences. Investors - institutions and private individuals alike - learned some hard lessons in the dot-com era. It's always possible that a strong run in the market and the prospect of profit will cause them to forget those lessons, but that has not yet happened and is unlikely to any time soon. Institutions in particular are paying far more attention to issues of corporate governance and accounting than they did in the past.
Likewise, the corporate valuations that form the basis of M&A deals (and thus determine the degree of risk involved) are more realistic today. Despite this, the recent increase in M&A activity is driving up the share prices of takeover targets in particular and the sector as a whole.
Another key difference, which is a new phenomenon at least so far as Europe is concerned, is the growing presence of private equity investors (PEIs). Not everyone welcomes the way in which these corporate raiders behave, whether before or after a takeover, but few doubt their acumen when it comes to corporate finance.
In the 1990s, European telecoms M&A was dominated by trade buyers, with both carriers and vendors engaged in a headlong rush for the next big deal. Now, the increased role of PEIs is an important indicator on several fronts. The fact that private investors are contemplating deals of $10 billion and above places them squarely in opposition to the biggest trade players.
Indeed, the PEIs are in large part responsible for stirring the major telcos and equipment manufacturers into action on the M&A front. Several recent takeovers have turned into pitched battles between trade and private equity players. In the case of mobile operator Amena in Spain, the trade buyer triumphed in the form of France Telecom. With Denmark's TDC, private equity won the day.
The fact that carriers are even contemplating a return to the M&A fray is in itself another good sign. All the major European telcos were guilty of over-extending themselves in their M&A expenditure in the 1990s. It has taken until now to repair the financial damage and horrendous debt positions that resulted.
That experience is still sufficiently fresh in the memory to ensure a cautious approach among European carriers. Even the largest telcos seem less likely to pursue global M&A strategies except where required to support their international managed services businesses. This is a far cry from the 1990s, when everything and anything was considered worth owning in pursuit of the global carrier dream.
Instead, recent activity has been concentrated closer to home. This makes the business case easier to explain to wary shareholders on the grounds of synergies or straightforward regional consolidation.
An interesting perspective on this comes from Hock Yong Chun, managing director of SingTel Europe. 'In Europe today it's a very mature market; if we are going to look at M&A, we have to see very good value for shareholders. While you can never say 'no', I think there are plenty of opportunities in our home Asia-Pacific region and that will be our focus, not Europe.'
This mirrors the approach being taken by the Europeans with a focus on their own backyard. There certainly is no shortage of opportunities on the block at present.
Except where public declarations of takeover intent are made, European telecoms M&A is a world of rumor and intrigue. Each transaction sets the market looking for the next one. Sometimes analyst or trader comment is enough to set the wheels in motion. At other times, the carriers themselves are complicit in such rumors as they seek to flush out possible suitors (see 'On the block‾ Five classes of potential takeover', page 23).
Within reason, a controlled flurry of M&A will give the European telecoms sector a much-needed injection of vitality. True, such activity is less welcome when synergies turn out to be reduced headcount and poorer quality of service. It's particularly controversial when traditional telcos, with some degree of public service obligation, are involved.
Yet these fears are outweighed by the benefit of re-charged management perspectives and reviews of strategy. A factor such as convergence means that the industry is changing faster than ever before and is alone enough to drive European M&A for the foreseeable future. While operators should have learned by now that you can not simply buy your way into a new era, an M&A strategy that is judicious rather than indiscriminate still has a vital role to play.
Done deals: five flavors of European M&A
Cesky Telecom; March 2005
Telefî£„ica of Spain beat off Belgacom, Swisscom and a PEI consortium with a $3.69 billion bid for a 51.1% stake in the Czech national operator. The deal set the stage for the consolidation of CT with its Eurotel mobile arm. Similar transactions have occurred in other CEE markets, as western trade investors (such as Deutsche Telekom in Slovakia and France Telecom in Poland) seek to consolidate their holdings to take advantage of rapid growth and FMC opportunities.
TDC; December 2005
The outstanding M&A coup to date for private equity in European telecoms came when a consortium of leading venture capitalists - Permira, Apax Partners, the Blackstone Group, Kohlberg Kravis Roberts and Providence Equity Partners - paid more than $12 billion for the Danish national carrier. TDC's board reluctantly accepted the offer after rival trade bids, from Swisscom among others, failed to materialize. The future of TDC's cellular assets in Austria, Lithuania, Poland and Oman is uncertain.
Amena; July 2005
France Telecom paid $6.4 billion for 80% of Spain's number three mobile operator, having been a late entrant into the bidding war that had previously featured competing consortia of PEIs. FT immediately announced plans to merge Amena with its existing broadband business in Spain, making this a fairly rational convergence play in a neighboring market. The PEIs complained that their interest had been exploited by Amena's previous owners to obtain a higher price from a trade buyer.
tele.ring; August 2005
Within days of the sale of Amena to FT, arch-rival Deutsche Telekom reacted with the $1.3 billion acquisition of tele.ring, the number four cellular operator in neighboring Austria with just under one million customers. DT's intention was to roll tele.ring's customer base into its T-Mobile subsidiary, which was already number two in Austria. It is no coincidence that the deal put pressure on the country's number three operator, Connect ONE, which is owned in part by"&brkbar; France Telecom.
O2; November 2005
In the most audacious trade takeover of recent times, Telefî£„ica offered $31billion for O2, the wireless arm of BT that was demerged in full in 2002. The Spanish giant's interest followed months of speculation, later confirmed, that Deutsche Telekom and KPN had been mulling a bid for the UK company. O2 might have been expecting a higher, counter-bid. It was to be disappointed. Telefî£„ica now seems set to rebrand its wireless businesses as O2, in much the same way as France Telecom did after its 1999 purchase of another UK celLco, Orange.
- Jim Chalmers
On the block‾ Five classes of potential takeover
- The willing supplicant: Ireland's eircom, the former state PTO bought out by private equity in 2001, is up for sale again.
- The perennial targets: the UK's Cable & Wireless and KPN of the Netherlands, both of which are no strangers to the M&A scene as protagonists, are also habitually cited as targets themselves. Both have market values around the $20 billion mark, which is now seen as a realistic benchmark for aggressive PEIs. 'We are wide open to initiatives that will help us fill in our strategy faster,' said Ad Scheepbouwer, KPN chief executive in May, leaving it open to whether this means offensive or defensive participation in the M&A arena. It is also frequently linked with C&W and a defensive merger between them, while not especially logical, is not impossible.
- The big prize: after the fallout from the tech sector's meltdown, BT received private equity approaches and rumors of these persist to this day. Such whispers have been overtaken, however, by the reported interest of Deutsche Telekom in a $30 billion-plus takeover. Although considered unlikely, it was enough to lift BT's share price in May and could spark renewed interest from elsewhere among the PEIs or even from an acquisition hungry US carrier.
- The stalked prey: one ongoing M&A saga concerns Portugal Telecom. In February it was the subject of a $15 billion bid from its far smaller local rival, Sonae. The offer was flatly rejected by major shareholders, but their close links to the government have attracted regulatory scrutiny from the EU as well as alerting PEIs to the company's possible availability. Added spice comes in the from of the involvement of Telefî£„ica and France Telecom in PT and Sonae respectively. This looks certain to develop into a major, if protracted, battle.
- The industrial plaything: Telecom Italia has been the subject of takeover speculation for more than a decade, having gone through two hostile takeovers by Italian industry/investment groups since 1999. When current owners Pirelli/Olimpia usurped Olivetti as TI's strategic owner in 2004, the move looked to have more to do with Pirelli's financial position than that of TI as the dominant player in Italy's telecoms market. It would not take much to spark another round of corporate blood-letting.
- Jim Chalmers