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Author: Mike Cansfield
Recently, activist fund Cevian announced it had bought 72 million shares in Swedish/Finish telco TeliaSonera. In July, the Australian-based investment fund Babcock and Brown bought a controlling interest in Irish incumbent Eircom. Last year, Apax Partners led the purchase of TDC in Denmark, although in Spain France Telecom beat two rival offers from investment groups for Amena. Why are investment houses (private equity, investment funds etc) so interested in the telecoms sector?
Comment: It seems to us that Investment houses are interested in telecoms for three reasons.
Firstly, there is a view that telcos are underperforming in terms of what they give back to their shareholders, and in terms of their share prices. Whilst telcos (particularly incumbents) can generate cash (and so pay short-term dividends), they are finding it much harder to grow revenues as the fixed business declines and as mobile growth runs out of steam. Hence low share prices. But there is a belief that telcos could do far better, particularly as they are high-tech industries. The opportunity is to buy now whist share prices are low, get involved in the management of the company, develop the business, and then and sell in the future when bigger profits drive values higher.
Secondly, if you look at how the telcos are structured it is not difficult to conclude that the whole is worth less than the sum of the parts. Traditional telcos organised in vertical silos, such as fixed/mobile/ISP, or by product line within these broad headings. We refer to these structures as “monuments to the past”. Whilst this approach has its advantages - they are good focussing on P&L, and create clear management responsibility etc - they are largely internal to the company. Externally, they create obstacles to doing business - customers have to talk to each line of business separately, and none of the silos is able to talk to each other freely. The opportunity for financial investors is to re-orientate the business to create a greater customer/market focus and in so doing simplify their operation and release value. This is rationalising the distribution side of the business.
The third reason for investment houses to be interested relates to consolidation and transformation. So far we have seen consolidation through ownership - C&W/energis in the UK, Neuf Telecom/Cegetel in France, SBC/BellSouth/AT&T in the US are all examples. The first thing C&W and energis agreed to do was to consolidate their business onto one network and so take out a large swathe of costs. But consolidation of this type does not have to take place at an ownership level. There is no reason why telcos can not consolidate the supply side of their business - including the network- onto a wholesaler or outsourcer. The transformation of the industry through next-generation networks (NGNs), convergence of telecoms and IT, and convergent services all enhance this opportunity rather than diminish it. So opportunities exist in telecoms to rationalise the supply-side of the equation too.
But (as ever) there is another side of the coin. Telecoms is a complex high-tech sector that also happens to be undergoing a fundamental transformation. NGNs underpin much of the potential in the sector, but these investments are not risk-free. Without a vertically integrated national telco (i.e. an incumbent) it is hard to see how this key enabler could be deployed nationally. So whilst the sector is attractive to investment houses, nothing is straightforward.
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