Telecoms operators are back in the game

Major deals have been scarce in recent years, but now there is solid evidence of a revival in mergers and acquisitions.

Bharti Airtel's acquisition of Zain's African operations last year gave it an immediate footprint across emerging African markets. Trevor Snapp / Bloomberg News

As the region continues to pull itself out of the slump caused by the global economic crisis, there is new evidence the recovery is picking up steam.

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After a two-year lull, mergers and acquisitions (M&A) activity in the telecommunications sector is showing signs of a revival. Several announced transactions indicate operators are renewing their pursuit of growth.

Operators announced US$7.7 billion (Dh28.28bn) in Middle East and North Africa (Mena) deals in the first quarter of this year.

Before the global economic slowdown, the telecoms industry was in the middle of a wave of M&A as operators pursued inorganic growth.

Deal activity in the Mena region had been brisk for years, averaging more than $8bn in annual transaction volume from 2006 through 2008. In the following two years, operators shelved all but a handful of small M&A deals as management yielded to shareholder demands to adopt a prudent and risk-averse approach to weather the storm.

Now several operators have announced large deals as they resume their quest to grow in the face of saturation and strong competition. This is good news, as it shows the industry is getting back on track. But it could also be good news for telecoms customers.

Larger operators can lower costs - and prices - as they gain scale, offer lower roaming rates as they establish a presence in more markets, and enhance their ability to roll out next-generation offerings.

This M&A activity is expected to be manifested through consolidation, which will take one of three forms: major cross-border deals; in-market transactions; and consolidation of ownership within the same operator.

Cross-border deals are expected to dominate, with a significant portion likely to be large transactions involving GCC operators and those operating in emerging markets such as Africa, India and China.

These deals include those in which major groups enter new markets through large transactions by acquiring controlling stakes in other groups with presences in more than one market. They also allow operators to pre-empt competitors who might acquire increasingly scarce and attractive targets.

For sellers, these deals are also appealing. Operators may be in a distressed position, unable to finance their growth needs or achieve scale through large transactions to compete with global players, or simply because such transactions provide attractive exit points.

Bharti Airtel's $10.7bn acquisition of Zain's African operations last year, which gave the company an immediate footprint across emerging African markets, is one example of a big cross-border deal. The acquisition turned Bharti into a key regional player and let it export its low-cost operating model from India to markets abroad.

VimpelCom's $6.5 million acquisition of Wind Telecom, which controls Orascom Telecom, is another example of a major deal, creating the world's sixth-largest telecoms group.

Although cross-market deals will be the most prevalent, we will also see some in-market consolidation as operators acquire competitors within specific markets.

Such transactions can offer compelling advantages - a huge increase in market share, elimination of direct competition, and access to lucrative market segments.

They can also help operators gain spectrum, expand network coverage, and improve service quality while reducing costs through economies of scale.

This form of consolidation has been successful in other markets and is likely to do so in Mena.

In the UK, T-Mobile and Orange merged in 2009 to gain scale in a fragmented and competitive mature market.

In March, AT&T announced the $39bn acquisition of T-Mobile, Deutsche Telekom's US subsidiary, which will catapult AT&T ahead of Verizon to become the largest US mobile operator, while providing enhanced spectrum in a constrained market.

Finally, we are likely to see operators consolidate ownership, allowing shareholders to gain full control over specific operations. It enables more effective and agile decision-making, value and synergy creation across the group, and a chance to consolidate financials.

This is also appealing for sellers as they seek to exit investments for reasons including insufficient control; the need to raise capital to finance other opportunities; lack of strategic fit; or because target returns have been achieved.

Examples of this kind of deal include Etisalat's consolidation of Atlantique Telecom and Qtel's consolidation of Indosat.

Operators capitalising on this wave of consolidation could emerge as global winners. To succeed, they must have financial firepower, with a strong capital position and the ability to raise funds in the future.

They also need robust organisational readiness with a solid governance model, an organisational structure balanced between headquarters and subsidiaries, streamlined management processes, distinctive values and culture, and sustainable talent management.

Operators that lack the financial resources or are behind in their preparedness might find themselves becoming acquisition targets.

Karim Sabbagh is a senior partner, and Amr Goussous and Christos Mastoras are senior associates with the global management consultancy Booz & Company