Telecommunications executives from Vodafone Group to Deutsche Telekom and Telefonica are headed to the industry’s annual get-together in Barcelona next week with more on their minds than the latest handsets.
Deals under consideration at the highest levels could realign the industry on a global scale, and executives like Deutsche Telekom CEO Tim Hoettges and Vodafone’s Vittorio Colao, who are attending Mobile World Congress, carry the weight of decisions that will shape their companies for years to come.
At the annual meeting known mainly for gadget releases, Hoettges may run into SoftBank Group founder Masayoshi Son, who’s open to handing control of US carrier Sprint to the Germans in a deal that would upend the US telecoms market.
Vodafone’s Colao is working on a fix for an Indian operation that has lost billions, while navigating the next step in a mobile-to-cable alliance with Liberty Global — whose CEO Mike Fries will also attend. French consolidation may be taken up again later this year, and Spain’s Telefonica is still looking to extract cash from its O2 unit in the UK.
“We expect healthy M&A activity in 2017,” said Joachim Sonne, who co-heads the telecoms, media and technology investment banking unit in Europe, the Middle East and Africa at JPMorgan Chase & Co.
After falling for two years, the value of telecoms industry deals announced globally in 2016 rose 34% to US$266bn, according to data compiled by Bloomberg. Lower GDP growth is forcing the carriers to find new ways to drive revenue and earnings, Sonne said. Pressure to consolidate is mounting as companies have access to cash and attractive financing, he said, while financial buyers display a growing appetite and activist investors stir the pot.
In the US, where phone carriers have tried to merge with content players, deal making may be aided by looser regulation under President Donald Trump. In Europe, authorities have suggested they’re willing to allow mergers that increase competition or better position the region’s companies against larger rivals from the US and Asia.
“What held back M&A in the US was the Obama administration,” said Roger Entner, an analyst at Recon Analytics. “The US still sets the tone when it comes to M&A, and a more lenient administration will likely influence the rest of the world.”
At the forefront of US speculation is Deutsche Telekom’s T-Mobile US unit, led by maverick CEO John Legere. When Sprint’s attempt to buy the asset was derailed in 2014, T-Mobile was behind in subscribers, sales and market value. It’s now worth $52bn — 41% more than Sprint — and has grown rapidly with products like free video streaming and unlimited data plans for consumers hooked on YouTube or Netflix.
SoftBank is open to all options, including a partial or full sale of its 83% Sprint stake to T-Mobile, according to a person familiar with the matter. Talks with Deutsche Telekom are expected to start after a US spectrum auction ends in April, the person said. Deutsche Telekom declined to comment. A SoftBank official wasn’t immediately available to comment on its stance, which was reported earlier by Reuters.
At UK-based Vodafone, Colao has decisions to make on at least two fronts. The company is in discussions to merge its Indian unit with Idea Cellular, a deal that would create the country’s largest mobile phone company and bolster a business Vodafone wrote down by more than $5bn last year. The partners may sell as much as 20% of the unit once the deal is completed, CNBC reported this week.
Vodafone-Malone
Vodafone, the world’s second largest wireless carrier, has also courted Liberty Global, John Malone’s European cable TV company. The two companies have complementary businesses in major territories including the UK, Ireland and Germany.
“Both companies have publicly stated that there is an interest. If they came up with something people wouldn’t be too surprised,’’ said Arun Agarwal, partner at London-based hedge fund Altavista Investment Management, which owns stock in Liberty Global and Vodafone. “Everyone wants to be more quad-play,” he said, referring to Internet, TV, wireless and fixed phone services.
Since sealing a joint venture in the Netherlands at year-end, Vodafone and Liberty have been holding on-and-off discussions about more alliances or asset swaps, according to people familiar with the situation. The likelihood of such transactions or even a broader combination has increased with the potential solution in India and the rebound in Liberty’s shares, said the people, who asked not to be named discussing private matters.
While both sides are open to further deals, obstacles remain, the people said. They include valuation, geographical mismatches including in India, Africa and Latin America, and Malone’s super-voting stock in Liberty Global, one person said.
Vodafone and Liberty declined to comment. In January, Liberty Global’s Fries said the companies may look at swapping assets, though the long-speculated tie-up between the companies at a corporate level was “not on the table”.
Supply, demand
Not everyone is bullish on M&A prospects. There are more sellers than buyers in the telecoms market, which may make it hard for deals to get over the finish line, Entner said. Moreover, political and regulatory uncertainty may complicate larger global deals, said Richard Price, head of telecoms, media and technology in Emea at Mitsubishi UFJ Financial Group.
One company that hit snags is Telefonica, whose sale of its UK unit O2 was blocked by regulators last year, and had to pull a listing of its Telxius infrastructure unit before agreeing to sell a stake to KKR & Co this month. The Spanish company, which is trying to pay down debt, said this week that it could later seek an IPO of Telxius’s undersea cable unit or its tower division. Telefonica said it continues to weigh a stake sale or IPO of O2.
Deutsche Telekom’s Hoettges has long advocated for consolidation in Europe, where about 100 landline and wireless network providers operate. That would improve the industry’s cost structure as it competes on a growing number of fronts with large overseas rivals as well as Internet companies such as Google and Facebook.
Media mergers
Christian Lesueur, head of telecoms, media and technology for Emea at UBS Group in London, points out that with many smaller, single-country deals in Europe done, future activity will be larger and more difficult to execute.
One answer would be to seek alliances with content companies, as AT&T is attempting in its planned merger with Time Warner. Such deals will likely be looked upon favorably in Brussels, Entner said.
“If it’s a vertical merger, why deny it?” Entner said. “It’s a way for Europe to create competitors that can stand up to American companies.” — (c) 2017 Bloomberg LP
