Telecom Industry Could See Biggest Merger Spree Since ’06Amy Thomson and Cornelius Rahn
Global telecommunications companies are chasing deals from Kansas to Munich in a quest for revenue growth that could lead to the biggest year for mergers in the industry since at least 2006.
More than $80 billion in telecommunications and cable transactions have been announced or completed this year as companies from Dish Network Corp. to Japan’s SoftBank Corp. to the U.K.’s Vodafone Group Plc prowl for acquisitions. If Verizon Communications Inc. forges ahead with a bid for Vodafone’s stake in Verizon Wireless, deal volume would more than double, approaching the level of seven years ago, data compiled by Bloomberg show.
Companies are looking to grow through acquisition as demand slows for wireless and Internet services, and they’re seeking scale so they can afford to build the high-speed networks necessary for the latest mobile and video offerings. Bidders are clashing with each other around the globe as they compete for a shrinking pool of potential partners.
“Growth prospects are scarce and money is cheap,” said Todd Lowenstein, portfolio manager with Highmark Capital Management in Los Angeles. Acquirers are going after “valuable assets that are likely to be put to better use in a combined company.”
Being squeezed are some European telecommunications companies, which postponed investments during the debt crisis and have seen revenue plateau even as small competitors have stoked price wars. AT&T Inc. is scouting for possible acquisitions in Europe, deemed to have the highest mobile penetration in the world by industry group GSMA.
“We have some giant Internet companies in the U.S., we only have a few equipment makers left -- in order to counter that, there will have to be large mergers in Europe,” Deutsche Telekom Chief Financial Officer Timotheus Hoettges, who is set to take over as chief executive officer next year, was reported as saying in an interview by the Rheinische Post newspaper today. “Since our market capitalization is developing much better than that of our peers, we are well positioned.”
The biggest bidding war so far this year, meanwhile, is in the U.S., where Overland Park, Kansas-based Sprint Nextel Corp., the third-largest U.S. wireless carrier, is up for grabs. Sprint shareholders are scheduled to vote June 25 on a $21.6 billion offer from SoftBank. Dish, the second-biggest U.S. satellite-TV carrier, is weighing its options after Sprint’s board said its $25.5 billion takeover proposal lacked specifics. If the Sprint plan falls through, SoftBank has said it will go after the next-largest U.S. mobile company, T-Mobile US Inc.
With Verizon Wireless, the nation’s largest wireless carrier, and AT&T, the second-largest, holding a combined two-thirds of the lucrative U.S. contract-customer market, smaller rivals face a number of challenges. Sprint and T-Mobile don’t have the revenue of their rivals to spend on network technology to create faster connections for customers to watch video and stream music.
To address the issues of scale, small companies have started to consolidate. Deutsche Telekom AG acquired MetroPCS Communications Inc. in April to merge with T-Mobile, its U.S. unit.
“Regulators want a four-player market, but what make sense is three strong competitors in the U.S.,” said Roger Entner, with Recon Analytics LLC in Dedham, Massachusetts.
Telecommunications companies have commanded an average takeover premium of 27 percent in the past 12 months, according to data compiled by Bloomberg on 27 acquisitions valued at more than $1 billion.
Deals announced this year come to more than $80 billion, according to the data. That compares with about $157 billion in all of 2012 and $124 billion the year before.
“Phone companies’ margins have come under increasing pressure,” said Friedrich Diel, a fund manager at Frankfurt-Trust Investment who oversees more than 2 billion euros ($2.68 billion) in investments. “Most markets are very mature and don’t offer a lot of potential growth, which means growth has to come from buying others.”
An offer by Verizon to buy Vodafone’s 45 percent stake in Verizon Wireless, if completed at $120 billion or more, would push the year’s total to the biggest since 2006, when $281.8 billion in telecommunications deals were announced.
The potential offer by Verizon is the biggest under discussion and would give Verizon Communications full control of a business with strong cash flow. The parent company would have more flexibility and find it easier to pay dividends to investors.
Verizon has told analysts that it would be willing to offer $100 billion for the 45 percent holding, people familiar with the discussions have said. Citigroup Inc. said this month that Vodafone would hold out for $120 billion to $135 billion. Bank of America Merrill Lynch analysts said Verizon may need to pay as much as $140 billion to entice Vodafone to sell in a note after meeting with Vodafone CEO Vittorio Colao.
Vodafone holds one of the earlier deal records. Its previous incarnation, Vodafone Airtouch Plc, spent more than 150 billion euros in 2000 to acquire German company Mannesmann AG. Time Warner Inc.’s combination with AOL brought in $124 billion in cash and stock when the two combined near the end of the tech bubble in 2001.
Vodafone and John Malone’s Liberty Global Plc both want Kabel Deutschland Holding AG to expand their empires in Europe. Phone companies across the continent are bulking up their networks and adding services as they work to increase customer bills and loyalty. Bundles of TV, Internet and phone service are becoming increasingly popular, stoking deals and partnerships between carriers.
Liberty offered about 85 euros a share in cash and stock for Kabel Deutschland, Germany’s largest cable operator, a person familiar with the talks said, valuing the company at 7.5 billion euros. Vodafone responded, raising its own offer to 85 euros a share, people familiar with the bid said this week.
Liberty invaded Vodafone’s home turf in February, spending $16 billion in cash and stock to take over British cable-television provider Virgin Media Inc. in the largest media deal since 2007.
Malone, the billionaire chairman of Liberty Media Corp. and Liberty Global, said earlier this month that higher programming costs, a declining video customer base and surging demand for high-speed Internet have sparked excitement about acquisitions.
Liberty Media’s purchase of a 27 percent stake in Charter Communications Inc., based in Stamford, Connecticut, is intended to turn the fourth-largest U.S. cable operator into a “horizontal acquisition machine,” Malone said. Liberty and Charter management have met with Time Warner Cable CEO Glenn Britt to discuss a future merger, although Britt isn’t interested, according to a person familiar with the discussions.
“A lot of what you’re seeing are companies that don’t have a broadband solution trying to find one, or companies that do have a broadband solution trying to get more of it to increase their competitive advantage,” said Garrett Baker, president of Waller Capital Partners LLC, a boutique investment bank and advisory firm focused on the telecommunications, media and technology industries.
Regulators have blocked a number of deals recently, leading phone companies to lobby the European Commission, the European Union’s executive arm, for a more lenient regulatory environment.
Kabel Deutschland was blocked by the German antitrust regulator from buying Berlin-based cable operator Tele Columbus Group in February.
Liberty Global, which entered the German market with the acquisition of Unitymedia in 2010, was forced to take steps like removing encryptions and opening up contracts with housing associations to rivals when it added operator KabelBW the next year to form the country’s second-largest cable operator.
Lowenstein of Highmark Capital said he expects to see a more accommodating stance over time. “Regulators are likely more open to deals as new technologies are redefining the competitive landscape and concerns over past market concentrations issues,” he said.
Neelie Kroes, the EU commissioner in charge of the digital agenda, has promised to move toward a single telecommunications market in Europe. To be sure, that’s meant promises to get rid of roaming charges rather than breaking down barriers for deals so far.
“European telecommunications companies can’t wait; they need to boost investment in the coming years in order to offer faster services, while they are faced with declining profitability,” Andres Bolumburu, a Madrid-based analyst at Banco de Sabadell SA, said in an interview. “Regulators need to understand that the current situation and whopping number of operators is just unsustainable.”