Research: Telecom Operators Need to Rethink M&A Strategy

Taking a more diversified view of M&A could be the key for telecom operators to increase value while facing obstacles including customer saturation, an eroding topline and rising capital expenditures.

That’s according to new research from Bain & Co., “The New Age of Scale, Scope and Infrastructure in Telecom M&A.” The research identifies the three ways telecom operators can win: scale deals, scope deals and infrastructure deals. They will, however, need to think carefully about how to gain ground with these M&A strategies.

“Traditional telecom M&A consisted largely of in-country consolidations to capture scale synergies,” said Alex Dahlke, a partner in Bain‘s telecommunications and M&A practices. “In the next era of telecom M&A, we expect both scope deals in particular to accelerate, which will enrich telecom companies’ portfolios beyond connectivity, and a rise in highly promising infrastructure deals. Our research identifies the best ways telecom operators can use these M&A strategies for future value creation.”

Scale deals – in which the buyer seeks a larger presence in a particular market or sector – hold promise for helping telecom operators generate the highest levels of synergies, according to Bain. Scale deals, however, are getting trickier than ever. As the industry consolidates, it leaves fewer and fewer acquisition candidates for scale deals, which tend to be in-country by nature. In addition, regulatory and antitrust authorities have increased their scrutiny of larger deals, creating higher hurdles for deal approval.

Bain’s Alex Dahlke

“The time, expense and possible remedies to get scale deals approved is expected to rise,” Dahlke said. “Increased regulatory scrutiny raises the bar on due diligence and the depth of preparation needed for regulator filings and engagement. It also puts a premium on having a solid deal thesis that can help guide remedy preparation where needed and avoid losing value in that process.”

Scope deals – in which the target is a related but distinct business, enabling the buyer to enter a new market, product line or channel – can help telecom operators expand in new areas near their core business, capitalizing on their existing assets and creating more revenue from cross-selling and more customer loyalty, according to Bain. More companies will likely adopt this strategy to find a niche competitive edge or to build out verticals, with the primary goal of growing revenues and margins. Various avenues exist here, ranging from media and content to IT and services, to cybersecurity, AI or sales channels.

Infrastructure deals to spin off existing, build new or combine their existing infrastructure with partners will allow telecom operators to create synergies from better infrastructure utilization and appeal to new investors interested in the more predictable cash flows of infrastructure units, according to Bain. Tower and fiber company multiples on average were three to four times higher than mobile and integrated operators in 2016-2018. Still, as deal volumes ramp up, telecom operators will need to become much more sophisticated in the ways they structure such deals to monetize their infrastructure units going forward.

“Choosing from the plethora of options across these three deal archetypes requires careful attention to timing,” Dahlke said. “For example, a well-funded, growing market leader will need to explore very different options than its cash-strapped, network quality-challenged rival. While the situations differ for every company in every market, the telecom operators that do the best job of thoughtfully navigating the new age of scale, scope and infrastructure M&A to advance their strategy will be those that thrive as the market matures further.”