France's mobile operator SFR took 100% control of Neuf Cegetel in the fourth largest M&A deal in 2008

So far the telecoms sector has been relatively resilient to the global recession. Datastream's European telecoms index for instance has outperformed its all-sector equivalent by about 40% since January 2007.
While enterprise telecoms and IT spend has certainly been under pressure, it appears consumer spend — at least in developed markets — is holding up, save for discretionary spend on prepay mobile and some churn on the margins of the broadband market.
On the whole, consumers seem to be spinning down to cheaper bundles rather than cancelling services en masse.
With consumers spending less on eating out and entertainment outside the home, operators offering TV, broadband and telephony bundles are benefitting from increased time spent on home entertainment.

More subdued M&A activity

According to data from MergerMarket, global M&A activity in 2008 slowed less than one might imagine: table 1 highlights only a 5% fall in global M&A volumes, although the average deal size decreased 18% to £35 million.
However the global picture obscures some marked regional trends. M&A volumes in Europe and North America declined by a third in 2008 compared with 2007, with greater declines in the value of those transactions that did complete.
Volumes involving a Middle East target actually grew 40% in 2008 through investment by regional players — such as Zain, Saudi Telecom, and QTel.
Some observations based on the top 10 deals of 2007 and 2008 presented in table 2:
• Transactions in developed markets have slowed, with operators based in emerging markets — in China, Russia and Mexico — increasingly prevalent at the top end of deals;
• Quoted incumbents have been heavily involved;
• The majority of deals have been in higher growth wireless and broadband segments;
• Market consolidation, with some minority interest buy-outs, drove many 2008 deals.

The shape of the future M&A

With tighter availability of financing, and fewer attractive assets in growth markets, the focus of M&A is changing.
Here are four instances of how M&A activity might play out.
First, a small number of acquisitions of operators well-placed to capture growth within a single national market will continue. African and selected south-east Asian markets with low levels of SIM-card and broadband market penetration will gain the attention of European and Gulf-based operators in particular.

Know your asset

Fully understanding and articulating the value of potential acquisitions is critical in building a successful investment case, especially if lending banks are required to provide significant debt financing.
Having undertaken over 100 assignments over the last two years, KPMG's telecoms transactions team supports potential acquirors and vendors in analysing the nature and commercial prospects of telecoms operators, infrastructure and IT assets, including the identification, and support in capturing synergies.
Experience shows that undertaking due diligence and assessing synergies in different deal environments requires different levels of emphasis and approach.
The panel provides a snapshot of the key diligence areas in three of the deal scenarios we think will become more prevalent over the next couple of years.

Doing deals in Africa

Acquiring fast-growing operators in Africa, for instance, presents particular challenges relating to information reliability, a fast-changing regulatory and licensing regime and unclear ultimate ownership.
In assessing the quality of a wireless subscriber base or unpicking the components of ARPU, it is important to scrutinise call data records and other IT systems to validate run-rate revenue and customer numbers.
Understanding the level of potential risk of double taxation as a result of the expiration of an operator's pioneer status is also an important part of being comfortable of avoiding major nasty surprises in buying into fast-growing emerging markets.

Network-sharing JVs

Network-sharing provides substantial cash saving opportunities by reducing 3G or 4G roll-out capital costs, and lower ongoing operating costs per site — from reduced rent, rates, power, transmission and maintenance.
From our recent development and assessments of the business case for network-sharing JVs, we believe basing the commercial arrangements on the sharing of costs, rather than the valuation of the contribution of RAN assets, limits often fruitless debate on more contentious valuation assumptions and methodologies.
Securing agreement on the principles governing the pricing of maintenance and other services is also important for a smooth JV set-up.

Managed or IT services

Many operators are seeking to acquire IP-related software engineering, deployment and network integration capabilities. These deals are typically much smaller in size, and so often do not need significant debt financing.
In these deals it is important to ensure that the potential acquirer, or the vendor when faced with articulating the prospects of an asset earmarked for disposal, understands the key commercial aspects of important customer contracts, and the impact of the downturn on current revenue and margin trends, especially relating to those more discretionary services — such as integration and upgrades — which are the first cut by enterprise customers.
Examining how scalable the cost base might be when faced with earning recurring, contracted spend in these times is paramount.
In the emerging world of telecoms M&A, deals will increasingly be based on gaining in-market synergies, access to single-country operators in more selected growth markets, and the gaining of IP software and integration capabilities through smaller acquisitions.
Each of these different deals requires a different emphasis on diligence which is all the more important in remote locations and in a turbulent market where gaining financing will remain exceptionally challenging. GTB

Chris Woodland and Anda Goddard are with KPMG's telecoms media and technology transactions services team, based in London. Chris Woodland is on chris.woodland@kpmg.co.uk or +44 78 0863 2165

Table 1: M&A values and volumes 2007-2008

Based on location of target; value at completion date; South America includes Central America
Source: KPMG generated table using MergerMarket data, 16 March 2009

Figure 2: Top ten telecoms deals by deal size - 2007 and 2008

Source: KPMG generated table using MergerMarket data 16 March 2009