Panelists at the Winnik International Telecoms & Internet Forum expect immense merger and acquisition activity in developing markets around the globe, but predict little near-term M&A activity in the United States, where substantial consolidation has already occurred, or Europe, where logistical and business constraints affect consolidation opportunities.
John Krzywicki, partner at Analysys Mason, explained that there is significant international M&A activity in the telecommunications sector. In the wireless market, there are simply too many operators that cannot achieve enough scale to be sufficiently profitable, with the fourth largest operators globally only averaging 2.2% of their national markets. This abundance of providers, according to Krzywicki, has provided significant opportunities for consolidation in developing markets.While markets with an abundance of carriers with low market shares appear ripe for M&A opportunities, Richard Feasey, Public Policy Advisor with Vodafone Group, observed that although such dynamics exist in Europe, the likelihood of meaningful M&A activity there is meager. According to Feasey, there are many more wireless carriers in each European market than is ideal, leading to sub-optimal returns for even the most profitable carriers. And with disappointing earnings, carriers are unable to invest next generation wireless networks.
Feasey pointed out that policymakers in Europe hope to encourage the emergence of continent-wide wireless carriers, similar to the largest carriers in the United States, which can achieve greater scale and increase investment in advanced infrastructure. However, carriers are not lining up to expand across the continent because market fragmentation (e.g., advertising, retail) and supply chain fragmentation (e.g., utilities) reduce the opportunity for service providers to benefit from any economies of scale that acquiring a pan-European network could generate.
Carriers themselves would prefer increased consolidation within the individual national markets, rather than across Europe. National consolidation would allow wireless carriers to achieve greater scale in singular markets and achieve greater profits than would be yielded by expansion across Europe – a result that competition regulators in the individual markets are not likely to permit. The solution to the European conundrum, Feasey explained, is for policymakers and regulators to take the long view – allow for consolidation in the national markets and for the strongest national players to acquire and invest in networks across the continent, which would give carriers the ability to generate profit margins necessary to branch out into Europe and build the next generation wireless networks that the European economy will need. But there is little likelihood that any of this activity occurs.
While significant M&A activity in Europe is doubtful in the short-term, Mark Johnson, partner at the Carlyle Group noted that the rest of the world has plentiful opportunities for M&A in the telecommunications sector. As consumers transition from feature phones to smartphones, mobile devices are now outstripping the ability of wireless networks, and as a result, networks are becoming increasingly dependent on the use of Wi-Fi to offload wireless traffic onto fixed networks. Along with the increasing integration of fixed networks and wireless networks through Wi-Fi comes the opportunity for consolidation between the owners of wireless and wireline infrastructure.
The need for additional scale to invest in next generation networks, the glut of small carriers, and the confluence of wireless and wireline networks point toward consolidation; however, the example of Europe shows that these indicators will not always accurately predict increased M&A activity. According to the panelists, M&A opportunities are most robust in markets where decisions by policymakers on a national level (such as the Federal Communications Commission in the U.S.) provide certainty and stability in the regulatory approval process. Furthermore, investors in emerging markets should understand that while there are significant opportunities for M&A, the political and regulatory approval processes in those countries carry greater unknown risks and more uncertainty than transactions in more established markets.
Andreas Gruenwald, Hogan Lovells, Berlin
Stephen Kay, Hogan Lovells, Los Angeles
Richard Feasey, Public Policy Advisor, Vodafone Group
Mark Johnson, Partner, Carlyle Group
John Krzywicki, Partner, Analysys Mason