Article

The rise of telco carve-outs

Deloitte TMT M&A briefing

July 2016

After a sustained period of consolidation in the telco industry, we are now seeing an increasing number of companies divesting non-core assets as part of broader portfolio rationalisations.

The number of telco carve-outs in the UK tripled last year and similarly the number in Europe was significantly higher than the previous five years.

Telco boardrooms have been executing a range of strategic moves and this trend is likely to be further fuelled by the opportunities and risks created in a post-Brexit environment.

Overview

  • Telco carve-out transactions are becoming part of the changing corporate landscape - this trend is being driven by commercial factors, financial pressures and regulatory requirements
  • Within the converged telco/IT sector, we are seeing an interesting counter-trend of “de-convergence” with telcos divesting IT services division, which have been a management distraction and a financial drag
  • Carve-outs create a range of challenges and in our experience are best addressed through a multi-faceted and multi-disciplinary approach
  • We believe that careful consideration of value drivers is critical to both maximising value and certainty of sale

Key drivers

The trend towards carve-outs is being fuelled by shareholder or boardroom pressure to focus on core business that is expected to generate the highest returns. Specific drivers are discussed below:

“De-convergence” between telcos and IT services?

Telco players with IT services divisions are increasingly considering divestments in order to focus on network, voice and data offerings. This simplified product offering may lead to improved win-rates, greater efficiency and better margins

Merger clearance remedies

The requirement to divest assets following a merger is becoming an increasingly common competition remedy from European regulators, particularly in the mobile sector

Capital allocation

Demands on funding are ever present in the sector, for example to invest in next generation networks. Releasing funds held in non-core assets through M&A may allow re-investment in strategically important assets

Operating model - Owner vs. operator

Certain ICT players are increasingly moving towards infrastructure-light models, where ownership of the underlying assets is not an advantage and can actually impede flexibility

Management distraction

Non-core investments may become an expensive distraction for management

Looking ahead

  • The European telco landscape is experiencing high levels of M&A activity, with strategic moves being made at multiple levels
  • In this environment, non-core sales as part of wider strategic initiatives are likely to continue. Current market discussion supports this assertion both in Europe and other geographies
  • Carve-out transactions present a number of challenges to be managed as part of a successful sale process. In this context, preparation of the team, deal structure and business records are critical

Our approach

  • We believe that potential carve-out situations require a multi-disciplinary approach
  • Our approach is to consider strategic options broadly, including retain, refocus, invest or divest. Considering the commercial, operational and financial impacts of these options allows well informed and confident decision making
  • Our multi-disciplinary approach combines lead M&A advisory services with a broad range of Deloitte services to offer our clients a complete carve-out solution
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