Telecom Finance 2007

Peter Mackie, Consulting Director

The Telecom Finance conference this year was a fascinating affair. As well as the usual array of bankers, private equity specialists, lawyers and consultants, a range of telcos were represented. Even taking account of the Emerging Markets Summit on the first day of the conference, it was interesting to note that speaker representation from Middle Eastern telcos far outweighed that from Western European telcos.

The M&A opportunities in the emerging markets are clearly expanding as liberalisation is slowly taking place and the players who are seizing opportunities in those markets are (with few exceptions such as Telenor) the Middle Eastern telcos. Unsurprisingly, as they see their own markets opening up, they are adopting the strategy of expanding 'overseas' to take advantage of growth opportunities. Being awash with cash is certainly helping.

To take some examples from the Panel 'Middle Eastern Promise', chaired by Ovum Consulting: Jeremy Sell of Qtel announced that Qtel is creating a $2 billion 'war chest' to expand overseas as liberalisation was coming to his home market. Indeed, it was not just Qtel's strategy to expand but a 'national imperative'. Niche opportunities in the ICT/enterprise space are part of Qtel's international investment strategy, particularly in the Middle East. WiMAX licences as an entry means to provide broadband and fixed VoIP services in underdeveloped markets in Africa and other regions are also on Qtel's hit list. Qtel admitted these opportunities are sub-scale and that there are also plans to continue to bid for and buy major assets and licences, as demonstrated by its recent $635 million investment in Singaporean ST Telemedia (see also From East meets West to Middle East meets Far East at www.ovumconsulting.com).

We also heard Paul Doany, CEO of Oger Telecom, explaining how Oger will use Turk Telecom as a springboard for future investment and as a source of skilled staff. However, he was also careful to emphasise that Oger had strict financial return criteria (clearly learning from the mistakes of others and no doubt conscious of the number of financiers in the room). It was interesting to note that both Qtel and Oger mentioned Central Asia as a region that they were evaluating for further investment (apart from the usual suspects like Africa, India and Asia).

Dr Saad Al Barrak of MTC made a slightly controversial contribution. He explained his tactics of making a competitor pay more for a licence when MTC had decided that its strict financial criteria would not be met. As evidence of MTC's continuing ambition, Dr Al Barrack also announced that MTC would list in London later this year - and no doubt he has been inundated with offers of help since the conference ended.

So did we hear anything from the European telcos about their plans? Some joined the Convergence panel and talked about their plans for dealing with VoIP, fixed-to-mobile substitution (FMS) and convergence. We heard little from BT about its M&A plans. This panel was joined by Ovum's Martin Venzky-Stalling, who talked about the issues that investor need to consider when evaluating investments by telcos in NGN, fixed-mobile convergence (FMC) and x-play. FMC was discussed in a number of sessions, and for fixed-only players depends on MVNO partnerships such as BT's partnership with Vodafone - it will be interesting to see how these partnerships work out or whether FMC will drive further consolidation. In the M&A space, we heard a little bit from Telenor and TeliaSonera. Most presentations and talks by the European telcos were high-level and cautious - not to give away too much in front of so many from the financial industry.

The session entitled M&A opportunities in Europe: Who will lead consolidation? looked promising but did not live up to its name as no-one on the panel was prepared to name names. The conclusion was that there probably would be consolidation, but for the time being the large telcos had other things on their plate (see also Ovum's article in Telecoms Finance, January 2007: European Incumbents - dying slow but profitably? or check Thought Leadership at www.ovumconsulting.com).

A subsequent session did remind us (and them) that the Private Equity (PE) players are also playing in this game and getting more active. Mike Grabiner explained that Apax are still interested in acquiring telcos with strong defensive qualities and efficiency gains to be made. If the European telcos are not willing to restructure the European telecoms landscape and get rid of inefficiencies, the PEs might do it for them.

So what can we take away from this conference?

• The M&A, lending and project finance action has clearly moved to the emerging markets and the most active players are primarily from the Middle East. These players are fast becoming a force to be reckoned with. However, investors and lenders need to be cautious that sustainable strategies are created and that the projects financed (for example, licences) are viable, not overpaid, and generate the cash flow that is required to service interests and pay back the loan.
• With few exceptions, the Western European telcos are still reluctant to drive industry consolidation and restructuring. They are also not as aggressive in making international investment, potentially missing out on M&A opportunities for growth and future cash flows.
• It is far from clear who will consolidate in Western Europe - PE could well be the catalyst, though convergence could drive acquisitions such as mobile players buying smaller ISP, broadband or altnets to provide FMC services to corporates and high-end households.

Peter is a Consulting Director at Ovum, focusing on the telecommunications sector. Based in London, Peter works across both the commercial and regulatory areas.