M&A OPPORTUNITIES FOR TELCOS - Analysys MasonA activities in the TMT sector have slowed in 2016 – is it time for strategic investors to step in?

Hong Kong telecoms summit 2016

© Analysys Mason Limited 2016

Hong Kong Telecoms Summit

M&A OPPORTUNITIES FOR TELCOS

TAYLOR LAM

JULY 2016

Strategy Consulting



CONTENTS A SLOWDOWN FROM RECENT FRENZIES: OPPORTUNITIES FOR TELCOS?

TELCO M&A HOTSPOTS: ENTERPRISE ICT AND CONSUMER DIGITAL

CONSIDERATIONS FOR M&A IN NEW FRONTIERS

KEY TAKEAWAYS

2



M&A activities in the TMT sector have slowed in 2016 – is it time for strategic investors to step in?

185 176 153

254 223 260

153

45

60

34

4473

7677

8594

81

100 161137

224

423

20

172172

500

600

800

300

0

100

200

700

400

14

51

Q1 2016

Tota

l val

ue o

f dea

ls (U

SD b

illio

n)

511 525

768

307

2008

286

2007

501

85

222

315 333

2014 2015

123

2009

81

2010 2013

102

2011 2012

Asia-Pac

Media Telecoms

Technology

Global value of disclosed deals in the TMT industry

Source: MergerMarket

3






KEY TAKEAWAYS



Telcos’ recent M&A has moved beyond core business expansion to include the enterprise ICT space and digital consumer services

5

M&A

obj

ectiv

es

Core business

expansion

Business expansion

to adjacent areas

Participate in

disruptive business

Geographic focus M&A priorities

Local Regional / Global

Offer and/or geographical expansion

Financial impact not always immediate, but will provide a clear M&A story

Main M&A focus for telcos

Multiple domains possible, although success tend to require focus on a small number of domains

Mostly in the form of venture investments

BAU evaluations

Market consolidation is the prime driver

Enterprise ICT Cloud, mobility, and data centre shifts IT

budget “online”

Consumer digital Telcos are more than just a pipe in the

digital world

Source: Analysys Mason

5



Enterprise ICT has proven to be a growth driver for many successful operators

PCCW / HKT Telstra SK Telecom


6



Hosting, cloud and IoT represent the most significant opportunities for operator expansion beyond connectivity service offerings

Figure: Enterprise spend in 2020, and market growth

Connectivity services

Established, non-

connectivity services

Emerging services

1 Mobility services include mobile voice, data and related applications, such as mobile device management (MDM). By 2020, the splits of revenue will be as follows: voice 36%; data 60%; MDM 4%.

Mobility services1

Data networking services

Cloud services

Fixed voice

Analytics

UC

Fixed broadband

IT services IT outsourcing

Security

IoT

-5%

0%

5%

10%

15%

20%

25%

- 50 100 150 200 Enterprise spend in 2020 (USD billion)

Cloud services and IoT are the two key areas

for telcos, with substantial and fast-

growing markets.

Hosting

Key

2016

-202

0 CA

GR (%

)


7



Network Operators

Prod

uct/

te

chno

logy

as

sets

M&A

ratio

nale

Entity type

Acquisition objectives vary, and are dependent on the expansion “phase” of the acquirer

8

M&A cases Infrastructure Applications / Integration

Capa

bilit

ies /

sk

ills

Cust

omer

s

Location: USA Value: USD525m Target: Enterprise networking

Value: USD1.7bn EV/EBITDA: 2.8x EV/revenue: 0.5x Target: Subsea cable assets

Location: USA Value: USD350m (80%) EV/EBITDA:~10x Target: Data Centre

Location: Central and Eastern Europe Value: USD730m EV/EBITDA:6.3x Target: Data Centre Location: France

Value: USD11.5m Target: Fleet management

Location: USA Value: USD216m EV/EBITDA: 65.6x EV/Revenue: 3.9x Target: Managed security services




VoIP

Messaging

Video call

Video

Music

Games

Publishing

Digital Ads E commerce M-payment Mass SN

Niche SN

Transport

Travel

Weather

News

M-Edu

…

Comms Media / Content Ads Consumer

IoT Payment / Finance

Social Network

Market place /Agents

Info /Lifestyle

Education Commerce

Mainstream “Telco” digital services Other digital services

Revenues driven by digital advertising or direct subscription / usage fees

•Evolution from Telco convergence

•Relatively familiar territories

•Complex B2B value chain where Telcos can leverage key assets

•Diverse business models and profitability profile

•Highly fragmented, with less scope for Telcos to leverage key assets

•Business models are diverse and constantly evolving

The digital age has brought about new revenue domains where telcos compete against tech companies

Wearables

Smart home

Connected cars

…

M commerce Micro-

finance


9



Major telecoms operators are focusing on ‘new’ key domains such as ecommerce, digital video, digital marketing and mobile finance

Digital marketing Mobile Finance

Mobile advertising

(2012)

Mobile adtech: Real-time bidding

(2013)

Mobile adtech: Interactive 3D

ads (2012)

Cross channel digital ads

(2014)

Digital content analysis platform

(2014)

International Remittance

(2016)

Commercial Microfinanace (2008, 2016)

Banking and insurance

(2014)

Mobile advertising (JV with Dentsu)

Mobile advertising

(2012)

Mobile ad solutions (2013)

Mobile marketing: JV with Affle

(2014)

Mobile Apps Developer

(2013)

Mobile payment solutions (2009)

Ecommerce & payment solutions

(2013)

Digital wallet & payment solutions

(2015)


(2011)


10



Major telecoms operators are focusing on ‘new’ key domains such as ecommerce, digital video, digital marketing and mobile finance

Mobile Video & Media (2014) Runs Ecommerce

platforms in 50 countries

Online classified website


(2013)

Online fashion retailer (2013)

Ecommerce services (2009)

Online music retailer (2005

& 2012)

Online auction: JV with Rakutan

(2005)

Ecommerce Digital video

Video content mgmt &

distribution (2014)

Video searching software (2015)

Software Video Solutions (2014)

OTT Video Streaming

(2014)

Interactive Video Logistics Platform

(2015)

Home shopping and Ecommerce


11



Consumer digital services: strategic engagement models vary by operator, and venturing has delivered results

12

Gain greater visibility of innovation in the Internet

domain

Increase revenue and profits of

core telco business

Create new revenue streams to complement telco business

Business objectives: The ‘why’ for digital services

Execution Intensity: The how for digital services

Create ‘internet valuation’

businesses for spin-offs

Networking / market

scanning

Venture / seed capital investment

Incubation support

Shared risk investment partnership

Own build / investment







KEY TAKEAWAYS

13



M&A in new frontiers requires different preparation and a different mindset than core business M&A

14

Post-deal

Pre-deal preparation

1

• Select a few domains to focus on, and build a strategy or story around them

• Be prepared for multiple acquisitions – and the order of the acquisitions

• When scanning the market, allow for multiple paths to reach the same broad goals.

• Integration is not always best, especially for new initiatives

• Establish further partnerships to strengthen acquisitions

• Be prepared to divest when the price and timing is right.

Due diligence

2

• Fundamentals-based valuations; do not rely on multiples

• Beware of substitutes in the market as source of risks and alternatives

• Be aware of competitive bid landscape, bidders (for example, telcos, tech companies, PEs, VCs) have different motivations and sources of synergies.

3

14






KEY TAKEAWAYS


© Analysys Mason Limited 2016 16

Key Takeaways

1 Enterprise ICT provides a solid growth area for telcos. Cloud, IoT and data centres are the prime drivers, but acquisitions should be consistent with a strategy that expands wallet share / breaking into enterprise customers’ ICT spend, by geographies.

2 Digital consumer services provide opportunities for fast growth business. Focus on a small set of domains, and be prepared to make multiple acquisitions to build scale in these fast expanding markets. Execution approaches could range from pure investment to buy-and-build of an entirely new business.

3 A different mindset / preparation from traditional M&A is required. Focused, but flexible, underlying strategy is needed, given that the M&A space is much more complex in these domains.



Contact details

17

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Taylor Lam Principal [email protected]

https://hk.linkedin.com/in/taylor-lam-5300b120

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Hong Kong Tel: +852 3669 7090 [email protected]



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M&A OPPORTUNITIES FOR TELCOS - Analysys MasonA activities in the TMT sector have slowed in 2016 – is it time for strategic investors to step in?