The Sprint-Dish battle is all over bar the shouting, and Softbank should get its wish of control over both Sprint itself and spectrum-rich Clearwire. That leaves two interesting questions which will help shape the US mobile and broadband markets ‘ will Dish, which still needs a partner to make its own wireless plans viable, now seek a network/spectrum sharing deal with Sprint/Clearwire, or an alliance with T-Mobile/MetroPCS? And if Dish chooses the former ‘ or gives up its LTE plans altogether and sells its existing spectrum, how will the newly public TMo respond to its much strengthened competitor?
As we argued last week, once the bad feeling of the recent weeks subsides, there is no real obstacle to Dish forming a partnership with Sprint, without the need for it to own stakes in the operator. It could achieve the two things it needs to make its 4G and quad play plans economically viable ‘ additional spectrum capacity and a low cost way to roll out the network ‘ by sharing spectrum with Clearwire and running its LTE system on Sprint’s Network Vision infrastructure. That would, in turn, bring steady revenue to boost Sprint’s finances, effectively reviving the pact it once envisaged with LightSquared.
This is the logical move, but Dish is not always logical, and its maverick chairman Charlie Ergen may want full ownership and control of his wireless assets. That would point to a ‘plan B’ of acquiring Deutsche Telekom’s remaining stake in the merged T-Mobile/MetroPCS (the German firm is expected to exit the US eventually, but can only sell its shares in TMo within the next two years if it offloads its whole stake to an approved acquirer).
Ergen was reported to have held talks on these lines with DT, even before its hopes of acquiring a controlling stake in Sprint and/or Clearwire were dashed. This happened late last week when Sprint raised its offer for Clearwire to $5 a share, an offer which was accepted by shareholders. At that point, Dish had already dropped out of the running for a 68% stake in Sprint, in order to concentrate on Clearwire, but it did not top Sprint’ s new offer. Then, on Tuesday, Sprint shareholders voted to accept Softbank’s bid for a 78% share, leaving only regulatory approval between the Japanese operator and its dreams of US expansion.
It now looks set to achieve the double whammy, gaining control of both Sprint and Clearwire in the teeth of counterbids from Dish. At Softbank’s annual shareholder meeting last week, CEO Masayoshi Son was in triumphal mood, saying: ‘Everyone accused me of being full of hot air when I promised I would achieve trillions of yen in sales… They laughed when I said unapologetically in the year we made our biggest loss that I would soon earn trillions of yen in profits. I now say, we will become the world’s biggest company– by all measures, whether by sales, profit, or market cap.’
Son is known for such inflated statements, but while Softbank is unlikely to become the ‘world’s biggest company’, it is investing heavily to expand its business beyond its saturated home market and establish alliances and influence worldwide, especially with partners on similar technology paths, like Sprint/Clearwire. It founded its mobile business on the purchase of the then-struggling Vodafone Japan and Son said the process of turning Sprint around would be less challenging than transforming Vodafone KK, which it bought in 2006. It has also consolidated its domestic presence in recent years, acquiring Willcom’s 2.5GHz spectrum for TD-LTE and fellow Japanese cellco Emobile. It also has stakes in web-focused groups like Alibaba and Yahoo Japan and will bring to Sprint some advanced expertise in ‘telco over-the-top’ services.
Son believes Sprint’s operating profit has already bottomed out and it is poised for growth, and the return to profit will be accelerated by cost savings of $2bn to $3bn a year in the first three years, driven by the operators’ combined buying power. Globally, the combined Softbank/Sprint will be number three in subscriber numbers. Son indicated that Clearwire was an important part of the attraction of Sprint, adding: ‘We were faced with extremely difficult problem, since Dish could conceivably disrupt our plans’, and citing Clearwire shareholders’ support for the new Sprint offer, added: ‘Today is a good day.’
Sprint and Clearwire shareholders have benefited from the Softbank-Dish stand-offs. Last week, the Japanese firm raised the cash element of its offer, bidding $21.6bn, though also demanding more shares (78%, up from 70%). That was enough to prompt Dish to exit the race to focus on its plan to take over Clearwire, but Sprint improved its offer for the second time, to $5 a share, valuing Clearwire at about $14bn. This was a 47% leap on the previous Sprint figure, indicating the urgency with which the operator needs to seal the deal, and therefore remove any further obstacles to its Softbank alliance (which brings very welcome injections of funding into the Network Vision and LTE programs). Clearwire shareholders, which have held out for a better valuation of the firm’s spectrum since the process started, supported the new $5 offer, which topped Dish’s most recent proposal of $4.40 a share. Sprint says it now has the support of the owners of 45% of the non-Sprint shares ‘ although the cellco itself holds just over 50% of Clearwire, it needs to win 50% of the remaining shares to prevail.
The Sprint/Softbank deal is part of a far broader global wave of telco M&A. This is being driven by the need for massive scale in a highly competitive space, and by the move towards quad play bundles. The former factor is seeing a new set of multinational carriers, some coming from emerging markets, looking to expand their territories. Some are seeking new markets as their own saturate, as Softbank is, while others are piecing together empires across high growth areas which they hope could make them the new Vodafone or Telefonica. While those major players step up their own M&A activity in emerging markets, so they will face challenges from these newer giants ‘ Bharti Airtel, MTN, Sistema and many others.
This changing of the guard is reflected in the latest developments in India, where it looks as though established giant NTT Docomo of Japan will exit the country, while Russia’s increasingly ambitious Sistema Group will increase its presence. Talks are reportedly at an advanced stage for Docomo to sell its 26% stake in Tata Teleservices to Sistema, which already operates under the MTS brand in India via its venture with Shyam.
According to the local Economic Times, Tata Group, the carrier’s parent group, would also sell part of its stake to the Russian firm, which is expanding its interests in its home markets and beyond. Sistema will be eyeing a controlling share in an Indian telco, and Tata is said to be in favor of this move.
NTT Docomo acquired its stake in Tata in 2008 for $2.7bn and launched under the Tata Docomo brand. It had previously indicated it wanted to raise its stake, but its confidence in the market was rocked by the scandal surrounding 2G licence allocations. That saw 122 licences being revoked and their owners forced to bid for them in a new auction. Meanwhile, in a market with the lowest ARPUs on earth and unsustainable levels of competition in some areas, Tata Teleservices has ended up with heavy debts and losses. This has not only cooled Docomo’s ardor, but alienated the main parent ‘ Tata Group is said to have cut off new funding for its venture, forcing the cellco to end services in some operating circles.
Sistema has also suffered problems with its own joint venture, MTS-branded Sistema Shyam, which saw 21 of its 22 operating licences cancelled in the 2010 scandal and has also suffered losses ‘ it is targeting positive operating profit only by the end of 2014. However, it has taken the opposite approach to Docomo’s, apparently deciding the long term opportunities in India are worth the short term pain, and that it needs to build sufficient scale to be competitive with leaders like Bharti Airtel.
Sistema was the sole bidder for 2G licences in the second round auction to reallocate the recalled spectrum, and paid $665m for GSM frequencies in eight circles, bringing its total of operating regions to nine. The interesting aspect is that the 1.8GHz band could be refarmed for LTE in future ‘ many operators round the world are adopting this as a short cut to 4G, and an ecosystem of devices and roaming is developing rapidly.
Now the Russian player could significantly increase its presence by effectively merging the Tata and Sistema ventures ‘ provided, of course, it can get round regulatory hurdles. Although the government has been discussing rule changes to ease foreign investment and mergers in the telecoms sector, in order to encourage more economically viable groups, current laws could force Sistema to give up, or pay market price for, Tata Teleservices’s spectrum holdings, if it takes majority control of the group. However, that may delay rather than wreck the deal, since the Department of Telecom will reportedly announce its new M&A policies within three months.
The other major factor driving telco M&A is that, in developed markets, operators, increasingly need to offer quad play bundles in order to maximize the revenue from each subscriber, and the level of account control. This means they require both wired and wireless infrastructure, as well as media platforms. That was a clear factor in Dish’s attempts to add 4G to its pay-TV empire, and in the acquisition strategies of other major players ‘ Vodafone’s stalking of wireline assets in its key European territories, and cableco Liberty Global’s increasing activities in Wi-Fi and cellular.
Vodafone has scored a significant victory over Liberty, agreeing to acquire Germany’s leading cableco, Kabel Deutschland (KDG) after increasing its price to €7.7bn ($10.1bn) to fend off Liberty’s rival bid.
As carriers look to build quad play services based on both wireless and wireline broadband, formerly separate groups like cable/media giant Liberty and formerly mobile-only Vodafone are becoming competitors ‘ as well as potential partners in some areas. Liberty’s interest in KDG would have seen it broadening its cable interests in Europe’s largest market, but would almost certainly have run into antitrust problems, while the Vodafone/KDG combination satisfied German regulatory desire to see stronger multimode competition to incumbent Deutsche Telekom, while not reducing the number of cable players any further. Liberty completed its own €16bn takeover of UK-based Virgin Media recently.
Once the Vodafone/KDG deal is finalized, the UK-based firm will have access to an additional 8.5m connected households, adding these to the smaller wireline activity, Arcor, it acquired with its Mannesmann superdeal in 2000. KDG’s board is set to recommend the new €87-per-share bid, which tops Liberty’s reported €85 offer (and previous Vodafone offers of €80 and €85). The new price includes €84.50 per share plus payment of a €2.50-per-share dividend announced by KDG in February. The cableco will remain a separate legal entity after the transaction closes, and its management will take on responsibility for all of Vodafone’s fixed line retail activities in Germany as well as be a partner to housing associations.
Many point out that Vodafone has shown interest in KDG before, and would have paid a far lower price had it moved earlier. However, access to wireline broadband is becoming increasingly urgent, raising the valuation of cablecos. Guy Peddy, an analysts at Macquarie Bank, told Bloomberg: ‘They finally decided to go for it when growth expectations have re-rated and valuation’s at an absolute peak. There’s an opportunity for them to get more active in the consumer unified-conversion market space, and this offers them a route to that.’
KDG today forecast sales growth of 8% for the fiscal year ending March 31 2014 after revenue, a slightly higher rate than in fiscal 2013, when sales increased by 7.7% to €1.83bn. In a statement, the German firm said adjusted EBITDA earnings are likely to be about 48% of revenue. Vodafone said it expects to generate over €300m a year in cost and capex savings in the four years from completion of the deal, excluding integration costs.
It will also face complexities though, since it reached a deal with Deutsche Telekom last month to use the incumbent’s own high speed DSL and fiber network. This will leave Vodafone having to integrate two networks and consumer propositions as well as deal with potential clashes of interest between its two partners.
‘Kabel Deutschland and Vodafone are an ideal fit,’ the former’s CEO Adrian von Hammerstein said in a statement. ‘Together, we have the opportunity to become Germany’s leading telecommunications and television provider and to create what for the German market is a unique, winning combination of fixed line and mobile communications.’
All this activity has led to a total of $80bn in telecoms and cable acquisitions being announced or completed so far this year, according to Bloomberg calculations, and there is sure to be more to come. AT&T is the center of many rumors, such as buying a stake in Telefonica or an Indian partnership. It could also try to outbid Verizon in Canada (see inset). Orange, Vodafone and several emerging market giants are engaged in race in Africa and the Middle East; Liberty and Vodafone will continue their quad play rivalries; and the pressures on the European economies will spark further consolidation there. All that will boost that $80bn figure considerably by year end and on into 2014.