Why the comms sector is a big deal
Positioning today for tomorrow's market is a key driver of telecoms M&A activity, according to industry experts.
The telecoms M&A market remains buoyant despite Brexit and concerns about a slow down in the economy. This is because technology companies, especially in telecoms and IT services, thrive by helping their customers to do more, to be more productive and efficient, and often to remove costs. "There is now so much talent, capability and financial capital within the sector that we expect a strong continuation of M&A at, or above, the levels of the last few years," stated Marcus Allchurch, Partner at Acuity Advisors.
"The vast majority of telecoms M&A we are seeing is about buyers positioning for the future, whether at network operator consolidation level (EE/BT or the aborted 3/O2 transaction), equipment vendors (such as the merger we advised on between Sub10 and Fastback), through to solution providers including the transaction Acuity advised on between Sipcom and Rigby Group. A common theme is the creation of a business that is able to thrive in a fast evolving market. This is also true with private equity investors who continue to gain more experience in telecoms and build on some excellent deals done."
Post-Brexit M&A activity has not waned. Instead, overseas buyers are attracted to the UK because of a considerable price reduction in home currency terms. "In some cases we are seeing renewed competitive tension," commented Allchurch. "Trade consolidation is likely to continue as a result of bigger players bringing on new skills and capabilities such as UCaaS or fixed wireless access, where we would expect to see strategic pricing and customer base acquisitions."
There continues to be a wall of private equity money focused on the telecoms and IT services sector, observed Allchurch. "More and more we are seeing PE houses setting up their own specialist teams focused on this sector which has delivered some stellar returns over the last decade," he said. "Even more exciting, there are a number of US PE houses looking to invest their funds into the UK."
Factors likely to propel M&A activity in 2017 and beyond are the continued positioning for a strategically relevant set of services, revenue growth and defensive M&A should churn or ARPU come under pressure. "From top to bottom, the comms sector continues to be one of the most innovative in terms of technology development, growth drivers and its ability to generate attractive returns for investors," added Allchurch.
"Alongside the success stories however there have been some high profile aborted deals, and there has also been a number of notable distressed deals this year which reinforces the importance of taking advice from experienced and sector focused advisors well in advance of making a decision to buy, sell or raise finance. Cash generation and growth are still king when it comes to exciting potential investors, and these should always be critical items on any management team's business plan."
Trends in valuation are also clear. For must-have strategic, fast growing and highly cash generative businesses multiples are at an all-time high, but for others they can be lacklustre. "As a selling shareholder or buyer there is no substitute for working with an experienced and trusted advisor who understands the sector and who will provide a realistic, rather than flattering, view on value," added Allchurch.
The private equity backed Ôbuy and builders' will continue to build scale as they start to approach their own exit windows, observed Adam Zoldan (pictured), Director at Knight Corporate Finance. "We are also seeing some strategic deals with buyers looking to add expertise rather than simply scale, particularly in the face of falling spend on traditional comms," he added. "The market is lively with a higher number of well funded buyers than ever before, driven by investment from private equity such as Sabio, Wavenet and Southern Comms, and continued confidence from the banks which are happy to make debt available to fund deals."
M&A is driving consolidation but a high number of players in the market has not narrowed the choice of acquisition targets. Meanwhile, driving convergence through strategic deals has become a natural progression as customers are now more familiar with cloud and the as-a-service model, observed Zoldan.
Another notable aspect of the UK telco M&A market is the amount of funding available. "It's such a turnaround from a few years ago," said Zoldan. "And valuations are holding up well, but clearly scale is now driving value. There has been far more competition for the larger businesses with turnover of £15 million-plus as investors and trade buyers compete. This materialises as a value premium. We are therefore seeing a significant value gap between larger and smaller deals. But all deals are a complex process and due diligence is an area where they can trip up. Good preparation and access to clear and consistent management information will help any company fly through the due diligence process."