players telecom cable mobile markets deals potential
A better way to M&A;: Zeroing in on telecom valueThe recent surge in telecom M&A activity raises an important question: whichacquisitions will create the most value for your company? Always important,mergers and acquisitions (M&As) have become essential among expansion-mindedtelecom players in Europe as organic growth opportunities begin to evaporate.Analysts currently project worldwide industry growth will fall into the 2.3 to2.9 percent range through 2018, down from 4.4 percent during 2009–2012. Oneconsequence of this decline: telecom players in the EMEA region (Europe, theMiddle East, and Africa) have accelerated their M&A activities (Exhibit 1).However, while the industry is making more deals, are they the right ones?Exhibit 1We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:McKinsey_Website_Acces[email protected]## What motivates telecom M&AsWhile successful telecom M&A deals all share important similarities (eg,expected positive outcomes and captured cost synergies), specific acquisitionstend to rise or fall according to the unique calculus that governs individualcompanies. A new heat map tool, supported by a comprehensive database, canhelp leaders choose the right acquisitions for the right reasons. The M&A heatmap provides a first indication of potential deal scenarios, while the synergydatabase offers a granular set of ideas for developing outside-in valuecreation estimates based on benchmarks from recent European telecom mergers.The heat map–driven approach allows users to create an overview of the mostlikely scenarios in the European telecom market, enabling them to work throughpotential strategic moves and to zero in on the most compelling acquisitions.Choosing targets wisely is a must-have skill today, because leading telecomplayers have enough “firepower” (ie, balance sheet strength) to do significantdamage if they misjudge opportunities (Exhibit 2). Globally, industry playerscurrently hold combined cash firepower of €45 billion.Exhibit 2We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected]## From trends to archetypes: Populating the heat mapIdeally, acquisitions should help operators address the major trends they facetoday, which often requires combined investments in future technologies thatposition the company in a leading industry role. In the EMEA region, thesetrends include finding ways to make money from data and digital media, andsatisfying so-called “technology-agnostic” customers (eg, subscribers whodemand seamless connectivity across platforms, systems, devices, and apps).Other important trends involve closing competitive cost gaps, capitalizing onbig data, resolving the competition between mobile devices and PCs/laptops,finding effective ways to participate in the over-the-top (OTT) opportunity,and dealing with cloud computing. Based on these trends, the M&A screeningapproach establishes a number of M&A “archetypes”— overarching opportunitiesto address the identified industry trends—and uses them to create an M&A heatmap. Typical archetypes identified by the process and supported by recent M&Aactivities include: * Fixed-mobile convergence: Combining mobile operators with either cable or fixed-line companies. There have been several large convergence-driven deals in the EMEA region over the last few years, with more potentially to follow. * Local mobile consolidation: This play typically takes place in markets where more than three players compete with each other. A number of global operators have engaged in these deals, with additional deal discussions currently underway. * Local cable consolidation: The goal is to roll up regionally complementary cable players or to achieve pure market consolidation. A couple of EMEA cable companies have initiated this play, which remains feasible in various markets across Europe, including, for example, Poland. * Cross-border cable/mobile consolidation: With several such deals already closed, this play creates cable conglomerates capable of capturing synergies from product development, licensing, and other similar pursuits across countries. Several European countries still offer potentially attractive consolidation plays.Would you like to learn more about our Telecommunications Practice?Each of the above archetypes reflects specific trends. For example, both datamonetization and technology-agnostic customers tie in with fixed-mobileconvergence, while digital media monetization links with cross-borderconsolidation. The resulting M&A heat map enables telecom players to workthrough the potential value each archetype offers (Exhibit 3), identifyacquisition targets, rank the transactions in terms of likelihood andcomplexity, and understand the strategic consequences if other players acquirethe targets.Exhibit 3We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:McKinsey_Website_Accessib[email protected] heat map reveals both past deals and future opportunities that align witheach of the four archetypes. For example:Fixed-mobile convergence. The matrix makes it possible to identify playerswith mobile and/or fixed-line operations, and to search for complementarylocal providers or multinationals with coverage in specific markets. In orderto filter out markets with a high probability of complementary deals betweenoperators that only (or predominantly) have either mobile or fixed-lineoperations in a market, companies can use the broadband-to-mobile market sharedifferential to estimate the degree of fixed-mobile convergence. The higherthe fixed-mobile convergence index, the less converged a respective market isfrom a fixed-mobile perspective (ie, the higher the likelihood of dealsbetween fixed and mobile operators). For example, Ireland, Russia, and severalEastern European markets are currently the least converged telco markets inEurope from a fixed-mobile perspective. As such, these countries will likelysee more deals between fixed and mobile operators, and/or convergent pressure(ie, bundled discounts), than markets that are further along this path, suchas Finland, Spain, France, or Portugal.The analysis also reveals other insights. For example, even counting recentlyannounced or cleared deals, the UK remains one of the least converged keymarkets in Western Europe, followed by Austria, Norway, and Denmark (Exhibit4). This could suggest the high probability of additional deals in thesemarkets with the potential involvement of multinationals as well as localplayers.Exhibit 4We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected] mobile consolidation. For telecom players interested in local mobileconsolidation, the matrix allows them to investigate markets with more thanthree players where no evidence of emerging deals exists (concentrating onmarkets with over three players often enables companies to avoid potentialregulatory constraints). It can provide additional information on the state ofplay in specific markets such as speculations on, for example, potentialdivestments. It also helps companies to identify the most likely targetmarkets for consolidation, enabling them to run potential scenarios toevaluate possible strategies. To that end, it provides operator market shares,revenue growth, and recent EBITDA (earnings before interest, depreciation,taxes, and amortization) margins.Experience suggests that cost synergies are the key driver for value creation.Depending on a deal’s depth of integration and the degree of transformativechange it drives, companies can use the synergy database, which features morethan 80 levers, to identify potential synergies that equal up to 30 percent ofthe combined operating expenditure (opex) baseline and over 15 percent ofcombined capital expenditures (capex).Local cable consolidation. Huge differences exist across Europe in terms ofcable penetration. For local cable consolidation opportunities, the matrixmakes it possible to investigate markets that still have a large number ofsmaller independent cable players. For example, a variety of markets,including Poland, still exhibit high numbers of smaller cable players. Thelargest cable operator in Poland controls just under 40 percent of the market,while the market shares of the next four players range from 3.5 to almost 20percent, and a contingent of even smaller players contribute the remaining17.7 percent of the total market. Likewise, Belgium and the Netherlands havehigh concentrations of cable companies, making it worthwhile for potentialacquirers to analyze the underlying cable players in terms of number andmarket shares. The analysis also reveals that still other markets, notablyGreece and Italy, have no cable infrastructure at all and thus are irrelevantwhen it comes to developing consolidation scenarios (Exhibits 5, 6).Exhibit 5We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected] 6We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected] consolidation. Companies pursuing cross-border consolidation canuse the matrix to identify “white spots” globally where no multinationalconglomerates currently operate (or may have assets to sell), or findpotential business plays among local providers. While cost synergies areharder to obtain in a cross-border merger, high potential still exists,especially if companies choose to go beyond pure combinatorial measures.McKinsey’s synergy database features a collection of cross-border levers withtotal synergy potential of up to 20 percent of combined opex and over 15percent of combined capex (not all levers would apply in all mergersituations).## Gaining new insight into competitive motivationsBy analyzing the M&A archetypes, leaders can unlock the reasons whymultinational telecom players engage with each other. Three archetypes canexplain why some companies maintain continuous discussions with their peersregarding potential M&A deals across markets. First, the impulse to addressmobile and cable convergence might lead to a strategy focused on creatingintegrated players with significant mobile and fixed market shares, giving thenew entity a stronger competitive position compared to pure mobile or fixedoperators. Second, the need to address the local cable consolidation archetypecould enable two or more companies to consolidate their fixed assets inmarkets in which both companies currently participate in order to benefit fromincreased scale and the cost and competitive advantages it brings. And third,the urge to consolidate its assets on a cross-border basis could lead onecompany to extend its footprint in Europe, and both players to seek largerscale operations.## Integrating EU telecom merger regulationRegulation plays an unusually powerful role in the telecom industry, and itsimpact on M&A deals is no exception. Consequently, understanding theimplications recent regulatory actions could have regarding telco M&Aactivities is a mandate for acquisitive industry players. One recentregulatory trend involves the increasing proportion of M&A deals approved with“conditions.” For instance, the percentage of M&A deals approved in the EUwith conditions increased from 8 percent during 2004–2010 to 31 percent during2010–2016. This growing trend recognizes the industry need for consolidation,and the reality that higher levels of concentration often require newremedies, which drives the increase in conditional approvals.How telecom companies can win in the digital revolutionSpectrum divestment and network access are two key conditions often stipulatedin telco mergers. Others include network-sharing, access to content, furtherasset sales, and roaming considerations. Recently, the EU heavily objected toa particular mobile consolidation, with a planned four-to-three merger blockedon the EU level. Additionally, further consolidation strategies, for instance,local attempts to create two-player mobile markets, have so far failed aswell.In addressing other effects that are detrimental to competition, the EUcommission can take steps that go beyond market share considerations. Anexample that applies directly to telecom players involves concerns that amerger would create a high degree of “substitutability” (eg, the merger wouldlimit output because the products of the two companies are perfectsubstitutes).* * *The M&A heat map and synergy database offers telecom players a new, morefocused way to approach mergers and acquisitions. Based on an innovativescreening logic and continuously updated to maintain accuracy, the approachcan help leaders to identify seismic industry trends, translate them intoactionable strategies, and work through the competitive implications ofpotential deals.