MENA telecom industry on the verge of M&A wave, says Strategy&

13 December 2017 8 min. read

As telecom companies in the Middle East and North Africa (MENA) region continue to expand, they are beginning to venture into the booming information and communications technology (ICT) sector, primarily using inorganic growth strategies. As a result, M&A activity in the telecom industry is due for substantial growth in coming years.

A number of telecom companies in the MENA region intend on becoming digital conglomerates, according to a new report by the Middle East arm of Strategy&, formerly known as Booz & Company. To this end, companies are moving beyond traditional strategies of horizontal consolidation, or upscaling operations through investments, crafting a growing number of plans to use the M&A arena for expansion in the digital landscape.

Even within M&A on the table, telco’s are re-examining their strategies. The strategic process is deemed key to work towards consensus among stakeholders on the demand, feasibility and precise intention of a transaction before proceeding. “Such clarity of purpose allows companies to assemble profiles of potential targets, anticipate synergies more accurately, and compose a coherent post-merger integration plan to create a comprehensive ecosystem in their new digital domains,” says Chady Smayra, a partner at Strategy& based in Beirut.Global Telecom M&AGlobally, the telecom sector has seen a similar pattern of increasing M&A. The study found that between 2010 and last year, the number of deals being closed in the industry have consistently been above 350, with 2015 seeing 517 closed transactions alone. In terms of value, however, 2014 was the standout bumper year, when total deal value reached $240 billion, the highest in a decade for the MENA region. Much of this consisted of Verizon’s $130 billion acquisition of Vodafone’s 45% indirect interest in Verizon Wireless to gain full control over the company’s operations.

Compared to the global figures, the Middle East is being dwarfed both in volume and value. North America and Europe have contributed 68% of the total value of deals conducted since 2010. In that same period Asia has contributed 18%, while the MENA region held a mere 1%, which amounts to just 37 deals. Among the large MENA deals closed in the period are Middle East telecom giant Etisalat’s sale of its continental operations in Africa to Maroc Telecom for $650 million, and France Telecom’s majority acquisition of Egyptian mobile phone company Mobinil. Transactions that have so far been completed in 2017 include the share-based investment of Oman Telecommunications (Omantel) into Kuwait-based mobile company Zain, and the deal that saw Emirates Integrated Telecommunications Co (EITC), the parent company of telecom brand du, acquire the rights to operate Virgin Mobile in UAE.

Crossing Borders

From an overall perspective, four key pillars are highlighted as drivers of growth: the pursuit of international growth, portfolio optimisation (building on a global trend that has been around since the 2008 financial crisis), capitalising on convergence (looking beyond scale to unlock areas of value through multi-play offerings), and expansion into adjacent markets. The latter is in sync with developments across the M&A industry – the rapid rise of digital is seeing corporates and private equity rush to the stage to buy their way into digital capabilities, scale, or innovative technologies.Breakdown of deals by adjacenciesA recent report from The Boston Consulting Group for instance found that the share of digital deals in private equity portfolios has more than doubled since 2008, while analysis by KPMG showed that nearly half of all venture capital, which includes deal activity, flows to the hands of tech, online and software players. In telecom, the expansion into adjacencies increased sharply in 2015 and 2016, with a total of 213 deals valued at $14 billion (excluding Softbank’s acquisition of ARM Holdings in 2016 for $32 billion) during these two years, versus 184 deals valued at $5.1 billion during 2013 and 2014. “Operators shifted emphasis again due to the growing intensity of conventional and unconventional competition and the difficulty of monetising data consumption. Key focus is to expand capabilities to position themselves as end-to-end ICT providers,” explains Amr Goussous, a partner with Strategy& in Dubai.

In terms of expansion into adjacencies, a majority of the deals at a global level have been of the Business to Business (B2B) character, while only 4% were of Business to Consumer (B2C) type, and the remaining 18% were both B2B and B2C. In terms of revenues, the revenues compiled by B2B transactions accounted for 99% of the total $36.9 billion generated in technology deals. Goussous: “Telecom operators found a more compelling proposition in the B2B space, given the ease of bundling and accessing the extended capabilities without fully having to integrate the target into its operations. Such an approach proved to be more difficult for B2C propositions.”

Breaking it down by segment, the deals last year were distributed evenly among the E-commerce, Social Network, Gaming, and DSL/Internet Telephony categories, each accounting for 25%. However, the revenues came from different sources. Last year, 36% of the revenues were generated by the software segment, 20% by data center and cloud, 14 by analytics and Internet of Things, 8% by managed networks, 9% by system integration, and 13% by other segments.

Breakdown of revenues by adjacencies

The MENA region

Within the MENA region specifically, telecom M&A generated $585 million last year, resulting from the closure of five deals. The entry into the ICT and other industries over the last few years is apparent, with 57% of the revenues generated since 2010 coming from cross-border deals.

Meanwhile, 38% of the revenues were generated from stake-increasing deals, with a mere 5% as market entry deals. In total, the region has generated more than $10 billion since 2010, most of which came in 2014, when it generated more than $5.6 billion through closing six deals.

Strategy&’s report predicts that the Middle East telecom market is ripe for increased deal activity, “Telecom operators certainly have the cash and the appetite for acquisitions,” says company partner Chady Smayra. The market will meanwhile exhibit some differences to the global scene. Despite the pursuit of scale and portfolio optimisation, convergence is unlikely to become as significant in the MENA region. Smayra: “The triple and quadruple plays that worked to access the home segment in developed markets have been less effective in the region because of the dominance of free-to-air channels and ease of access for consumers, the considerable MENA presence of global over-the-top (OTT) players, and the lack of cable infrastructure.”

MENA deals since 2010

Instead, the executive consultant adds, the next wave of M&A in MENA will be fueled by the aspirations of regional telecom operators to offer ICT services, specifically those focusing on advanced B2B solutions and digital or adjacent consumer plays. The Gulf Cooperation Council (GCC) is regarded as the most likely sweet spot for deals, leveraging the region’s fast growth forecasted in the ICT B2B and B2C industry. “This market is expected to grow by 12% in the coming three years to reach $14.3 billion in 2020,” Smayra said.

While a large chunk of deal investments will be closed by telecom players, non-industry players, such as governmental entities and financial institutions are also expected to intermingle, with much of their involvement attributed to national economic and digital transformation plans, including public–private partnerships.

Goussous concluded, “Telecom M&A is gaining momentum globally, with the aim of redefining industry boundaries through digital services. Cash-rich MENA operators must follow suit. Early movers can gain a significant competitive advantage. However, to succeed they must stop regarding deals as a stand-alone activity. Instead, they must understand that transactions in the digital domain are deeply intertwined with the corporate strategy of existing operations and require careful planning in terms of strategic intention, deal sourcing, type of operating model, and performance management.”

According to a recent study by EY, telecom companies are increasingly pursuing M&A as a means to pick up talent, as they in certain areas, including digital and engineering, are struggling to find and retain their top talent.