Telecoms dealmaking on hold in 4Q08

Melbourne, 27 April 2009. According to a new study from Ovum, the global analyst and consulting company, global economic downturn depressed valuations and dealmaking in the telecom sector in 4Q08.

Based on Ovum’s report, titled Financial Deals Industry Insight – Telecommunications (4Q08 edition), M&A deal count was 129 in 4Q08, from 192 in 4Q07, with only four deals valued above US$1B, from 10 in 4Q07. Public stock offerings dried up, from 14 deals in 4Q07, to just two in 4Q08: both from carriers based in the relatively robust Middle East & Africa region. Private placements also fell, from 25 deals in 4Q07 to just six announced in 4Q08: five small ones, and a large one in Asia Pacific: Telenor’s $1.2B for a 60% stake in India’s Unitech Wireless. Venture financing was flat year-over-year in 4Q08 (deal count and value), with most funds targeting US-based vendor start-ups.

Matt Walker, Ovum principal analyst and author of the report, says “the financial market turmoil resulted in the acceleration of some deals, but uncertainty was the dominant factor. While this uncertainty lasts, there is incentive to sit and wait, until expectations and valuations stabilize. Preliminary analysis of 1Q09 results confirms this view, but finds activity picking up in some areas.”

Noting that telecom is a huge industry worldwide, with service revenues of roughly US$1.4 trillion in 2008, and network capex of $200 billion, Walker says it was inevitable that the industry be impacted by macroeconomic conditions. However, he adds, “Telco financial health is stronger than several years ago. The industry has a variety of funding mechanisms available, and it is still perceived as central to economic growth”. Further, in several large markets – such as China, the US, Germany and Australia – telecom players are receiving government support (e.g. direct subsidy, tax breaks, and so on) aimed at offsetting the recession’s impact on telecom’s fortunes.

As for the outside advisory piece of telecom dealmaking, Freshfields Bruckhaus Deringer and Citigroup led the legal and financial advisory rankings in the telecommunications sector, respectively.*

Figure 1 (attached) shows the legal and financial advisor ranking tables for 2008 within the telecom sector.

Looking ahead, M&A activity is likely to pick up again in late 2009, with deals concentrated in emerging markets after a couple of large ones in the US in 2008 (Verizon-Alltel and CenturyTel-Embarq). After a relatively quiet 2008, vendor M&A in 2009 will likely be more significant, as exemplified by the (non-telecom) acquisition of Sun by Oracle on April 20. Venture financing should be broadly consistent with 2008, when wireless, software/applications, and chips were the hottest segments, along with a smattering of deals in the optical, packet, and FTTx/IPTV area.

As for public offerings, as long as stock markets remain jittery, telcos and vendors will look to private placements and other vehicles for needed capital. Emerging markets may see more public offerings in 2009, as was the case in 2008, when the biggest public deals globally came from Turk Telecom ($2.0B IPO in May) and Zain Saudi Arabia ($1.9B in March).