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Valuation drivers in the telecommunications industry - Financial trends - EY - Global

Valuation drivers in the telecommunications industry

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What is your current rationale for considering acquisitions?
Main strategic reasons for acquisitions — Answer fromtelecom operators
Rank Rationale
1 To enter new geographic markets
2 To strengthen the core business
3 To achieve economies of scale
4 To eliminate or reduce competition
5 To acquire new technology
6 To enter new product markets
7 To acquire liquid assets
8 To take advantage of low valuations/distressed assets
Source: EY Survey Why capital matters — Building competitive advantage in uncertain times — Telecommunication survey snapshot, February 2010

Telecommunications deal values by region 2000-2010


Source: Thomson SDC Platinum



Telecommunications operators have to grow through acquisition if they are to win the challenge of acquire or be acquired.

Normally perceived as a fairly stable sector, the telecommunications industry did not prove to be particularly resilient in the recent crisis. With M&A activity resuming, we surveyed over 50 senior executives in the telecoms industry about why they were looking to acquire. "To enter new geographic markets" came out on top.

Recent telecom M&A activity

Footprint growth has increased heavily in the last decade, where transaction levels peaked twice:

  1. The building of scale during the technology bubble of 1999-2000¹ , which launched the global footprint growth in the mid-2000s .
  2. Regional consolidation phases (e.g., US mobile market and European broadband sector) from 2005 until the slowdown in 2007, predating the financial crisis. During this period, large European operators increased their exposure to emerging markets, with Africa outperforming developing Asia as a target market for footprint growth.

Global telecom deal volumes/deal values 2000–2010

Source: Thomson SDC Platinum

Deal values by transaction type 2000–2010

Source: EY Survey Why Capital Matters (2000-2009) and Thomson SDC Platinum (2010 data)

Why telecoms are buying

In research earlier this year, we surveyed over 50 senior executives in the telecoms industry about why they were looking to acquire. "To enter new geographic markets" was the top response, followed by "to strengthen the core business."

Main strategic reasons for acquisitions —
Answer from telecom operators

Stronger emerging market operators look to buy abroad

Operators in emerging markets have built regional scale over the past few years, and contributed to the increasing numbers of deals in those regions, from 16% of the global deal value in 2007 to 33% in 2009 .



They now have the technical and financial capacity to develop and adopt external growth strategies. As a result, the acquisition of targets in emerging markets is no longer the exclusive domain of mature operators. For example, Bharti Airtel acquired Zain Africa in March 2010, for US$10.7b .

Telecommunications deal
values by region 2000-2010

In 2009, there was a sharp downturn in cross-border deals. Activity in any single country ("in-market deals") remained flat. This reflected reduced opportunities in cross-border footprint growth. However, in-market deals helped operators reduce costs and position themselves for convergence.

Impact of the recent financial crisis on telecom operators

The telecommunications industry is usually presented as a fairly stable sector, focused on the long term. However, the sector did not prove to be particularly resilient to the recent crisis.

General economic indices fell on average by 58% between October 2007 (when indices peaked) and March 2009 (the bottom of the market). Telecommunications sector indices² followed the general economic trend, falling by 49% over the same period.

Operator recovery varies by region

However, not all operators suffered from the economic crisis in the same way, and many have recovered in line with their local economy.

Operators in developed markets have been slightly less volatile than global economy indices. Operators in emerging markets lagged behind the recovery in the emerging market economies: telecommunications indices for emerging markets have increased by 31% since March 2009, while general economic indices of emerging markets have risen by 139% over the same period.

Emerging telecom industry market capitalizations versus average emerging economic indices from 01.01.2007

Source: Bloomberg

Nevertheless, the impact of the economic downturn on the share prices of the emerging market telcos (-53%) was somewhat consistent with that of their developed market peers (-47%) .

Developed telecom industry market capitalizations versus average developed economic indices from 01.01.2007

Source: Bloomberg



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1 Source: EY survey Why capital matters – building competitive advantage in uncertain times – telecommunications survey snapshot, 4 February 2010.

2 The following general economic indices were included in the analysis: CAC 40, S&P 500, DAX, FTSE 100, BSE SENSEX 30, SHANGHAI SE COMPOSITE, BRAZIL BOVESPA, RUSSIAN RTS $, MEXICO BOLSA, FTSE/JSE AFRICA ALL.

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