With BT having confirmed that the company is talks regarding the purchase of O2 from Spanish telecoms provider Telefonica, industry figures said BT buying back a mobile operator that it sold more than ten years ago was indicative of the changing face of the industry.
There is a growing feeling that the proposed deal, estimated to be worth around £9bn, could spark a flurry of consolidation activity spurred by increasing market confidence, as Hargreaves Lansdown head of equities Richard Hunter explained.
Industry consolidation
“The whole sector is ripe for consolidation,” he said. “It would have been preposterous to imagine that the likes of Sky and BT would be in the same space, but with the advent of quad play they increasingly are. When you add in Vodafone, the entire UK media sector could be one to watch in 2015. There could be a lot of activity, and it is not like the big players to be left behind.”
He continued: “The general corporate sentiment has improved on last year. It comes at a time when companies have been building up cash balances, and there are some many things you can do with the cash, including going on the acquisition trail.”
While telecoms industry mergers and acquisitions have traditionally favoured the seller, Nik Stanojevic, equity analyst at Brewin Dolphin, believes that BT is playing from a position of strength.
“Normally in terms of shares the buyer in telecoms is down – the industry has a long history of destruction in mergers and acquisitions,” he said. “What is different this time is that the market thinks BT has got a good deal, with two assets and two willing sellers.”
Baby bells
Stanojevic explained that while consolidation with the telecoms industry has been on cards for a while, the success of the ‘baby bells’ M&A in the US has set an example for Europe to follow.
“There is a lot of self-help and consolidation going on in the sector – it is a very interesting sector to be going on with,” he said. “In the US, what was known as the ‘baby bells’, where regional companies were consolidated into larger companies, the returns from owning those regional companies were very good. Europe might be entering into that kind of period, where there will be consolidation and that will be very good for some companies.
He added that changing directives from industry governing bodies will also encourage a period of consolidation.
“In Europe, regulation has moved from mobile to fixed and the tangible part of that is the EU regulators are reducing emphasis on price competition and increasing the emphasis on infrastructure and better quality services,” Stanojevic said. “Therefore the fixed line companies have been able to have the confidence to build out fibre and consolidate.
“The other thing is the feeling that they [regulators] want pan-European companies that operate across several jurisdictions. Some of the national operators could consolidate, which could be very positive. You’re not necessarily going to the same returns as when the US M&A happened, because some of those you could have made 300 to 400% on the shares, but it will make opportunities available.”
Jeremy Lang, partner at Ardevora, says another driving factor will be the desire of European companies to keep up with their US counterparts in diversifying their product offering.
He said: “I wouldn’t normally be terribly excited if they were just buying a mobile telephone business, but it is different at the moment because they are the only buyer in town and, from what we understand, there are two sellers. It shows the attraction of mobile versus fixed line.
“You have got look at what has gone on in the US, with Comcast moving into content, and everybody is moving in the same direction. There is constant pressure to consolidate. That is how you have to view a company like BT – it is not just a telephone company, it is a media distribution business.”
Investors
So what does the potential market shift mean for investors?
“Overall consolidation is very good for the sector, and if you own a basket of companies in there you could do very well,” Stanojevic explained.
“As an investor you want to own the seller – in this particular case Telefonica will be the beneficiary. In the complete take-out scenario you want to be the one that gets taken out. Depending on the deal you will get some real synergies, but the main beneficiary will be the seller. If you own the buyer and all the companies involved in the M&A, with all the synergies you could be up, but it is better to own the seller.”
