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

13 December 2017

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.

Uber bids on future with Careem, but outcome may depend on the past

01 April 2019

With ride-hailing giant Uber buying local success story Careem for a cool $3.1 billion during the past week, a timely report from PwC looks into creating value from M&A over the long-term. 

M&A is increasingly part of corporate activity, as companies seek to pick up market access, knowledge, new products or key talent. However, new analysis shows that value creation remains difficult to achieve, while many companies overstate their belief that a deal created value in the long term. New analysis from PwC shows that successful value creators have a long-term plan, are focused on value creation, and keep their eye on engagement with management and the retention of key staff.

M&A has for the past decade boomed, as private equity (PE) players and corporates have both sought to acquire companies; the former to boost, among others, their portfolio holdings in a period of high-speed growth and low-cost credit, and the latter to augment their innovativeness, expand product lines or access new markets. M&A deal value hit recent record levels in 2015, at $3.8 trillion, before falling marginally to $3.4 trillion last year.Value creation in acquisitions and divestmentsYet, acquiring companies remains a risky proposition, with outcomes not always positive for long-term growth. Current market turbulence is creating value uncertainties, while rapid technological change and global regulation environments contribute further ambiguity. Landing deals that prove to have long-term value has become ever-more tricky. To better understand the market, PwC recently released its ‘Creating value beyond the deal’ M&A report – with a specific focus on value creation post deal-making.

Among the firm’s findings; many companies are overly optimistic about the value created by a deal. While 61% of buyers believed that their last acquisition created value, the study found that 53% of respondents underperformed their industry peers on average based on total shareholder return (TSR) over the 24 months following completion of their last deal. When divesting, the study also found considerable levels of underperformance, with 57% underperforming their industry peers, on average, in terms of TSR for the same period.Initial M&A strategic focus and alternative prioritiesThe report contends that one of the issues faced by many companies is their failure to make value creation a key strategic focus from day one of the process. The survey found that 34% of acquirers made value creation a priority on deal closure, with 66% stating it should have been a priority from day one. In addition, the study found that strategic vision rather than opportunism is a cornerstone for long-term value creation – demonstrated by the broader strategy brought to deals by 86 percent of those who believed the last acquisition created significant value.

Yet, while strategic decision-making is a key part of value creation, PwC furthers that any such planning necessitates deeper consideration than a simple box-ticking exercise – requiring, rather,  strategic direction. For divestment, poor performers in terms of value creation were much more likely to say that there was no blueprint for action, at 87%, compared to those whom were successful in value creation, of which 99% said there was a strategic plan in place.Retention rates for key staff in successful acquisitionsLastly, various aspects of planning require key information, such as thorough due diligence. Yet, for successful value creation, there are less tangible and measurable areas of a business that also require attention. For instance, engagement with management – a focus on aligning cultures – is believed by 89% of respondents to drive more value. Furthermore, for acquisitions, considerable focus on key employees at the acquired company remains key to retaining value.

Here, 82% of companies that said significant value was destroyed lost more than 10% of key employees post-deal, while 50% of those citing significant value creation lost fewer than 5%. On the flip-side, no company which claimed significant value creation lost greater than 20% of its key retention targets – yet this occurred in 42 percent of cases of poor value creation. Indeed, it also happened for poor performers when just 11-20% of its desired employees departed.

“Deals that deliver value don’t happen by accident,” concludes seasoned M&A and divestiture specialist Bob Saada, current Deals Leader for PwC in the US. “Transactions should be an extension of your corporate strategy instead of a sudden opportunity. Companies that invest time in strategy, follow that course, and avoid chasing a shiny object just because it’s available will have a much better path to success.”