According to a new report released today, both strategic investors, such as telecommunications operators, and especially financial investors are benefitting from the prospects of continued high merger and acquisition (M&A) activity in the Central Eastern and Southeastern European telecoms markets. The report, produced by global management consultancy Arthur D. Little, predicts that the volume of telecommunications M&A transactions is expected to stay on similar levels as the €3.9 bn M&A volume realised by the ten largest telecommunications transactions in the region in 2007.
The new report, "
Mergers & Acquisitions: Bust or Boom in CEE Telecoms?", argues that three drivers will sustain high M&A activity in the telecommunications industry over the next 18 months and beyond: privatization processes, a new wave of CDMA and WiMAX license tenders, and increasing pressure to consolidate.
Who is on the buyer side in spite of the credit crunch?
According to Arthur D. Little's report, the major Western European telecommunications operators have been on a buying spree for years, as they have built their empires in the region. However, this activity has slowed down over the last year. Mobilkom Austria was the only Western European operator to acquire a further telecommunications operator in Eastern Europe in 2007. In 2008 so far, further empire expansion has also been limited. The most prominent example was the acquisition of a controlling stake in OTE by Deutsche Telekom, which allowed Deutsche Telekom to expand its empire through OTE's subsidiaries in Southeastern Europe.
Financial investors, who were already on the buying side in six of the 10 largest telecommunications transactions conducted in 2007, can become even more important as they currently face less buyer-side competition from strategic investors. This is particularly true for those financial investors specializing in the Eastern European markets and experienced in modernizing the processes and the outdated network infrastructure of the telecommunications operators in the region.
Privatizations and new license tenders drive further M&A activity
"M&A activity in the Eastern European telecoms markets should continue to be intensive for the coming 18 months. Apart from long-pending privatizations such as that of Telekom Srbija, we expect a range of start-up operations from the current wave of CDMA and WiMAX license tenders. These start-ups are often backed by financial investors and will eventually become the object of transactions," says Karim Taga, co-author of the report and Director at Arthur D. Little's Telecoms, Information, Media & Electronics (TIME) Practice.
Pressure to consolidate will lead to a new wave of telecoms M&As in the mid-term
The report points out that the value creation logic of telecoms acquisitions has become much less clear as mobile market penetration in most Eastern European markets reaches levels well above 100%.
"As market growth slows down, competitive intensity increases, putting pressure on operating margins. We can therefore expect that in the midterm, telecommunications operators in Eastern Europe will face increasing pressure to consolidate in an ambition to realize cost savings or to simply take a competitor off the market.   Operators that are currently benefiting from many years of strong revenue growth will start to feel the pressure to realize savings by taking over others. We can therefore expect a new wave of cross-border and intranational mergers in Eastern Europe, as we have been observing in Western Europe for several years already," reflects Christian Niegel, co-author of the report and Senior Manager at Arthur D. Little's Telecoms, Information, Media & Electronics (TIME) Practice.
"Mergers & Acquisitions: Bust or Boom in CEE Telecoms?" is now available for download at
www.adl.com/m_aceetelecom.