GRMA Comments on Telecom M&A Deal Risk
Steven LevineDecember 15, 2016
Regulators internationally have dealt multiple blows to telecoms deals this year in continued demonstrations of national protectionism and an increased focus on competition concerns.The European Commission (EC) and Chinese regulatory authorities may present the highest hurdles to M&A transactions amid fears of US dominance and in-market monopolies in their territories.
Regulators internationally have dealt multiple blows to telecoms deals this year in continued demonstrations of national protectionism and an increased focus on competition concerns.The European Commission (EC) and Chinese regulatory authorities may present the highest hurdles to M&A transactions amid fears of US dominance and in-market monopolies in their territories.
US anti-trust rules may ease under President-elect Donald Trump’s leadership, paving the way for more large American companies to enter Europe, China and other markets.
However, Sam Won, a principal at advisory firm Global Risk Management Advisors, told TelecomFinance that there is a high probability that large telecoms M&A deals in the EU and China will be blocked if they are seen to thwart competition and create monopolistic behaviour that dictates price.
In his view, it is more important than ever to assess regulatory and legal risks before proceeding with a merger.
‘Surgical’ solutions may be required
He expects telcos to “have to be more surgical” in their acquisition strategies, slicing out sections of other firms to acquire as opposed to buying an entire entity. But if a company chooses “to cherry pick” in this way, it may face a premium for the assets and would still need to clear regulatory hurdles.
Those pursuing M&A should strongly consider devising a ‘Plan B’ with a focus on sensible economics, he suggested. A resolution may entail selling a portion of the combined business or licensing technology to another player.
The conditions under which the EC gave the go-ahead to the Italian merger of VimpelCom’s (NASDAQ:VIP) WindTelecomunicazioni and CK Hutchison’s (SEHK:0013) Three Italia “suggest that future mobile mergers are unlikely to be approved unless such remedies are offered”, analysts at Moody’s Investors Service noted.
In the EC’s view, the remedies proposed by CK Hutchison and Telefónica (MAD:TEF) for the now-abandoned merger of their UK units Three and O2 did not alleviate its concerns that the deal would lead to less choice for consumers, higher prices and harm innovation. A successful Three-O2 merger would have reduced the number of UK mobile network operators from four to three, the others being BT’s (LSE:BT) mobile business EE and Vodafone (LSE:VOD).
Moody’s projects that, over the next 12 to 18 months, “it is unlikely that there will be more in-market mobile consolidation in other European markets with four mobile operators, such as the UK, France, Spain, Sweden, the Netherlands, Denmark or Poland”.
Adopting a similar stance to the EC when it opposed the Three-O2 merger, Israel’s Antitrust Authority rejected the merger of mobile players Cellcom (TASE:CEL) and Golan Telecom largely because of the potentially adverse effect on competition in the wireless market and the possibility of price increases for consumers. Local politicians had publicly opposed the merger, which was also blocked by the country’s communications ministry, contending that it would destroy competition.
In France, to address the EC’s anti-trust concerns about its planned purchase of rival Bouygues Telecom, incumbent Orange(EPA:ORA) offered to offload assets from the newly combined entity to rival mobile carriers Iliad (EURONEXT:ILD) and Numericable (now part of Altice-controlled SFR (EPA:NUM)). The deal was a victim of its own complexity however, with Orange and Bouygues (EPA:BOUY), owner of Bouygues Telecom, ending their negotiations on merger options in April after failing to agree on four major points, including valuations.
Chief concerns about the deal centred on the value and division of Bouygues Telecom’s assets, including its networks, customers and employees, while negotiations between the two companies were further hampered by the involvement of the French state, which held a stake of more than 20% in Orange.
Confirmation of the deal’s failure saw the combined market value of Orange, Bouygues, Iliad, Numericable and Altice plunge more than €8bn (US$8.5bn).
Cross-border deals also face high hurdles
Companies involved in cross-border M&A transactions should also strongly consider devising a ‘Plan B’, particularly in light of the geopolitical volatility caused by Britain’s vote to leave the European Union and the fact that unexpected financial consequences can arise from diverging monetary policies among global central banks.
Telcos seeking strategic acquisitions abroad may also have to deal with economic risks, as well as technology integration, potential cultural clashes, and regulatory approvals.
Russian billionaire Mikhail Fridman’s push for the cross-border merger of debt-laden, Brazil-based telco Oi (BMV:OIB4) and Teleco
Oi stock plunged by more than 15% after the announcement of the deal’s demise, and the distressed company filed for bankruptcy roughly four months later. The firm’s bankruptcy also made many investors warier of Brazil’s economic health and financial wellbeing.
In another cross-border deal, the inability of Australian telecoms giant Telstra (ASX:TLS) and Philippine conglomerate San Miguel Corp (PSE:SMC) to come to commercial arrangements led them to cease talks over a potential equity investment in a wireless joint venture in the Philippines.
Meanwhile, the EC is likely to keep a lid on major cross-border M&A in 2017.
Moody’s does not expect big cross-border deals across EMEA in the year ahead due to “the lack of significant synergies that can be achieved, limited financial flexibility to execute large deals as well as governments’ continued desire to protect their incumbent telecoms”.