News broke at the end of last week that Vodafone planned to sell its stake in the US wireless joint venture to its partner Verizon for $130bn.
Almost immediately thereafter, Nokia announced that it was selling its handset technology business to Microsoft for €5.4bn.
So what does this mean for the telecoms market…?
The market seems to agree that the $130bn (c.8.5x EBITDA) Vittorio Colao negotiated for its share of the JV was a very good value for the business. However, the business was also performing well and reported double-digit operating profit growth in Q2 2013.
In contrast, the market’s reaction to Nokia’s announcement was certainly more mixed, with some calling it: ‘a shockingly low price’, given the recent pickup in business for its low-end handsets; and others considering it ‘extremely reasonable’, given the falling market share and weak profitability.
And the scepticism has hit Microsoft, too, with arguments it overpaid driving an immediate 4.5% or US$11bn fall in value. It’s quite unusual to see a deal criticised as an over-payment and an under-value!
Catching on or catching up?
The sale of Vodafone’s stake, even after it returns 71% of the proceeds back to shareholders, will provide the group with significant resources to pursue its longer-term strategy, of consolidation across Europe and expansion within Emerging Markets. Potential targets that have been identified include:
- Fastweb, the Italian broadband and pay-tv company;
- Ono, the Spanish telecoms provider; and
- Jazztel, another Spanish company that builds high-speed fibre networks.
For Nokia, the sale to Microsoft of its underperforming (although recently growing) mobile unit in order to focus on telecoms infrastructure sees it copying the strategy Ericsson has successfully pursued. Similarly, for Microsoft the deal seems to be a last-ditch effort by the departing Steve Ballmer to catch up with Apple and Samsung.
Neither of these rationales suggest further large-scale acquisitions by Nokia or Microsoft, although we expect Microsoft to continue to make smaller bolt-on acquisitions and licensing deals in its new mobile division.
Because it is more strategic and expansionary, Vodafone’s deal is more indicative of the consolidation strategies that many European and US telecoms groups are currently pursuing, either to:
- gain market share – in July 2013, Telefónica reached agreement with KPN to acquire the E-Plus mobile operator and replace Vodafone as the #1 mobile operator in the German market; or
- secure capacity – in 2012, Vodafone acquired CWW in an attempt to bolster its fixed line operations in the broadband market; or
- enter the “quad play” market – where consumers are offered bundles packages of broadband, mobile, TV and fixed telephone line rental. This market is becoming increasingly attractive.
The Telecoms market has certainly made a dramatic start to Q3 2013 and could easily build momentum, stimulating further M&A activity in this fast-moving sector.
There also appears to be plenty of finance readily available to fund the right acquisitions, even at the larger end of the scale, given the large cash balances many corporates have tucked away.
Themes to watch out for could be:
- consolidation between different areas of the market to create more integrated customer packages (bundles);
- increasing acquisition activity from more traditional technology groups (e.g. Google or Yahoo, for both of whom mobile is strategically key, although in different ways); and
- increasing expansion into emerging markets, particularly Latin America and Africa.