Monday, May 24, 2010

M&A - FT is concerned that frustration is driving activity in emerging markets

[ft] From a distance it looks like a great party. Money is pouring into emerging market telecoms: deals worth $60bn, double the amount in developed markets, have been announced so far this year. According to data from Thomson Reuters, emerging market M&A has never accounted for more than half the telecom sector’s activity at this stage in the year. But rather than a sign of high spirits, some of this year’s flashiest bids are born of frustration, if not desperation. Emerging markets are not as lucrative as they seem.

Take Telef√≥nica’s attempt to gain full control of Vivo, its Brazilian mobile operator, by offering its partner almost 10 times earnings before interest, tax, depreciation and amortisation – more than double Vivo’s market value. Telef√≥nica was willing to pay that much because it needs to integrate Vivo with its struggling fixed-line business. Penetration rates have reached 90 per cent in Brazil and mobile tariffs are falling as competition grows, leading to the cannibalisation of fixed-line revenues.

Telecoms M&A volumesThen there is Bharti. The Indian telco paid about $10bn to ride a wave of African growth and diversify away from a margin-crushing price war at home – the same one that has prompted Vodafone to take a £2.3bn writedown on its Indian business. But even Africa is not the great growth frontier it seems: MTN was willing to pay about $10bn to get its hands on some of Orascom’s African businesses, in part because growth in the continent’s larger telecoms markets is slowing.

With Europe heading into an age of austerity, historically acquisitive European operators might be tempted to buy more emerging markets exposure to prop up their numbers. Investors should be wary: there is nothing worse than paying over the odds to get into a party so crowded you cannot even reach the bar. Just ask Vodafone.

Telecoms M&A

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