It was the second consecutive year of decline after strong growth in 2021. In Europe, the majority of the deal value continued to be accounted for by in-country scale deals and infrastructure divestments.
Scale M&A value was down 4 per cent year-over-year in the first three quarters of 2023. The Vodafone and Hutchison Group merger, which has a combined enterprise value of about $19 billion, was last year’s biggest scale transaction.
Bain said that Vodafone and Three, which is owned by Hutchison Group, are positioning the deal as a combination of two subscale operators to create a stronger market challenger with more investment resources. Regulators blocked a merger between the two of the UK’s largest mobile players in 2016, but Vodafone and Three’s leaders hope that their deal might go through.
In addition to macroeconomic and regulatory headwinds, mismatched valuation expectations often kept buyers and sellers from closing telecom deals in 2023, according to Bain’s survey of more than 300 M&A practitioners.
While transaction multiples on infrastructure deals held steady at about 25 times throughout the first three quarters of 2023, infrastructure assets’ trading multiples dropped to 14.7 times, the lowest in five years. So, even though infrastructure deals again made up more than half of total telecom deal value through the third quarter, the category’s value was down about 50 per cent year-over-year.
Bain said that the M&A environment will likely remain challenging for the foreseeable future. It added that high interest rates are pressuring many telcos to consolidate or carve out assets while adapting their M&A approach: 60 per cent of those surveyed are becoming more selective in the deals they pursue.
As a result, Bain said that this is creating pockets of opportunity for selective bets. These include fibre network consolidation, higher-growth segments attracting deals and regulators becoming more open to consolidation.
The report said that pressure could grow on fibre companies to make a deal if they don’t attract enough customers to deliver a return on investment. Added to that, many countries’ fibre networks have matured enough that companies’ method of value creation will shift from building the fibre infrastructure themselves to tapping into scale effects via consolidation.
Bain also expects robust activity in enterprise services, a high-growth market undergoing significant technology shifts, with the switch from copper to fibre, 4G to 5G, and on-premises data storage to public cloud. For telcos that have a small enterprise business or none at all, Bain said that it could be a good time to make targeted acquisitions to add capabilities or gain scale.
Other attractive segments, said Bain, included data centres as demand for data continues to surge amid advances in AI, IoT and other technologies. That can create opportunities, it said, for telcos looking to carve out data centre assets to shore up their cash positions.
The most likely suitors will be private equity firms, the study found. On the flipside, it said that data centres could be a source of growth for incumbent telcos in countries where governments are seeking nationally sovereign clouds to address data security concerns. Bain also expects telcos to continue owning and potentially expanding their data centre holdings in these markets.
As telcos continue to invest heavily in fibre network expansion and mobile network density, scale deals could provide cash infusions, said Bain. That’s critical as connectivity services become more commoditised, making price increases less palatable, it added. At the same time, geopolitical uncertainty has made communications network resiliency a greater priority for governments, potentially making regulators more favourable to consolidation. Yet, telcos will likely still need to take steps to allay competition and price concerns, such as by opening their networks to wholesale agreements, said Bain.
For their part, telcos executives perceive regulatory scrutiny easing. Telecoms was one of only two sectors in which executives experienced less regulatory scrutiny than they did two years ago, although it remains a concern for many.
Moving forward, about 30 per cent of telcos surveyed expect to do fewer deals in 2024 than in 2023. The buyer-seller valuation gap and the cost of debt are among the most important factors that will determine M&A activity in telecommunications, according to the survey.
Bain report concluded: “Those dynamics remain outside of telecommunications executives’ control, of course, but that doesn’t mean they should sit on the M&A sidelines, waiting for conditions to improve. Winners in this market will gain an edge by proactively scanning and acting quickly when the right deal openings appear. They’ll also prepare now so that they’re ready to seize the moment when macroeconomic conditions do improve.
“In this environment, the fundamentals become even more crucial. Leading telcos will reinforce their core businesses by shedding assets that don’t fit long-term growth plans, perhaps selling to unconventional buyers such as private equity.
“As more telcos come under financial pressure, it will create opportunities for competitors to increase scale in their core businesses and make moves in adjacent products and services, especially in fibre and enterprise technology services. Some of these investments might feel uncomfortable right now. Yet even as telcos get more selective in their bets, the most successful ones will stay bold.”