The intense pressures on mobile operators’ profits and growth, and the scale of the investment needed in mobile broadband, all point to a long-expected wave of consolidation, which would bring much-needed economies of scale to a few majors. The US has been embroiled in this process for years, and in some ways the Dish/Sprint/Softbank/Clearwire saga is just the latest chapter, following logically on from the reassembling of AT&T, the T-Mobile/MetroPCS merger, and indeed Sprint’s own acquisition of Nextel back in in 2004.
However, this latest instalment does have some different characteristics, which illustrate wider market shifts. For one, there is an international flavour which has been missing from US telecoms in recent years. Softbank could see a Japanese carrier gain control of the US’s third cellco, and while Verizon may well buy UK-based Vodafone out of their wireless joint venture, it is reported to be looking beyond US borders itself for expansion, as is AT&T. Both could find rich pickings in areas where there is too much competition and too little credit or cash flowing ‘ these factors are driving a new wave of M&A in Europe in particular, involving both local and external players.
The other new element in the Sprint story, also characteristic of the changed landscape, is the participation of a pay-TV provider, Dish. This highlights, like the activities of Liberty Global in Europe, how media and fixed line players need to add mobile services to their portfolios, just as mobile-only operators now need fixed line and content assets. All of them will only see growth in saturated markets by offering bundles, right up to a full quad play, which enable them to secure a larger part of the consumer’s communications, web and media spend.
So, fascinating as the Sprint saga has been, it is part of a far bigger M&A process which is kicking off in the developed telecoms markets ‘ and whose ripples will be felt in the emerging economies too, as the giants look there for new growth opportunities.
The latest twist for Sprint is that Dish has abandoned its battle with Softbank to control the cellco, and hopes that will clear the way for its other proposed acquisition, of Sprint’s Clearwire joint venture. While Dish has been battling with Softbank for a majority share in Sprint, it has also been fighting with Sprint itself for control of Clearwire, a war that culminated earlier this week in Sprint bringing a lawsuit to try to block the pay-TV firm’s offer ‘ which had been accepted by Clearwire shareholders.
However, that was always going to be a tough fight for Dish, since Sprint has just over 50% of the mobile broadband start-up, and its plentiful TDD spectrum is regarded as a key attraction for Softbank too. If Sprint were to lose control of Clearwire to Dish, Softbank might well seek to renegotiate the terms of its own deal ‘ possibly the lever with which Dish’s chairman Charlie Ergen, well known as a corporate poker player, will try to secure a favorable spectrum/network sharing deal, in return for stepping back from full ownership.
After all, Dish’s requirement is to gain additional spectrum and an affordable way to roll out a national LTE-Advanced network. Dish recently conducted tests of fixed LTE services in 2.5GHz spectrum owned by partner nTelos, and said it would use the same approach if it gained Clearwire’s frequencies. The tests delivered speeds between 20Mbps and 50Mbps using two test sites in Virginia, and kit from Ericsson and Alcatel-Lucent, plus BandRich ruggedized outdoor routers with built-in high gain antennas.
The firm has acknowledged that its 40MHz of AWS-4 spectrum, acquired from bankrupt mobile satellite providers, will not be enough on its own to support a viable business model, so it will need additional assets or partners. And a network sharing deal, with Sprint or possibly T-Mobile, could significantly reduce its cost and time to market for 4G.
Access to Clearwire’s plentiful frequencies in the 2.5GHz band, and a deal to have its 4G hosted on Sprint’s multi-technology, multiband Network Vision infrastructure, would fit the bill nicely. Subject to certain guarantees, actual ownership of either asset does not seem essential, and Dish could avoid some of the financing challenges associated with its two bids, if it could pressurize Sprint into a far-reaching alliance on good terms.
After all, although Clearwire would bring plenty of spectrum, it would also land Dish with increased debt and the cost of building out an LTE-Advanced network, which could then support quad play services and a wholesale business. And Sprint would do better to keep Dish close than to drive it into the arms of Deutsche Telekom (with whom Ergen is said to have held exploratory talks about buying the German firm’s remaining stake in T-Mobile/MetroPCS). Dish would also have brought the mobile firm strategic assets in the form of content alliances and the potential to look beyond cellular-only models ‘ even if Softbank brings more immediate injections of cash into the 4G roll-out, as well as more assured ability to finance its offer.
While an alliance might not be out of the question, for now the two firms are still playing brinkmanship. Dish has dropped its $25.5bn bid for 68% of Sprint in order, it said, to focus on ‘completing the Clearwire tender offer’. Softbank recently increased the amount of cash it was offering in its own bid for Sprint, though it also increased the stake it wanted from 70% to 78%.
‘While Dish continues to see strategic value in a merger with Sprint, the decisions made by Sprint to prematurely terminate our due diligence process and accept extreme deal protections in its revised agreement with SoftBank, among other things, have made it impracticable for Dish to submit a revised offer by the June 18 deadline imposed by Sprint,’ Dish said in its statement on Tuesday. ‘We will consider our options with respect to Sprint, and focus our efforts and resources on completing the Clearwire tender offer.’
The day before, Dish had slammed Sprint’s Clearwire lawsuit as a ‘transparent attempt to divert attention from its failure to deal fairly with Clearwire’s shareholders’. The legal action seeks to block Dish’s bid, arguing that the satellite firm had fooled investors into believing the proposal would work. Sprint had initially offered $2.97 per share for the 50% it does not own in Clearwire, which Dish topped with a $3.30 bid for majority control. Sprint then improved its offer to $3.40 and Dish hit back with an extra $1 per share, valuing Clearwire at $6.3bn. After that turn of events, Clearwire’s board backed Dish’s proposal, prompting Sprint’s legal action. Sprint argues that its deal is the only one that makes sense for Clearwire because the latter’s relationships are so tightly tied up with Sprint, including its only major wholesale agreement.
While the US market waits for the outcome of all this jockeying, the larger US operators are also looking out for their next M&A moves. Verizon Communications could snap up one of Canada’s smaller mobile players, according to reports in the country’s Globe and Mail newspaper, citing unnamed sources. It said the Canadian government aims to have at least four wireless carriers in each of the country’s regions to ensure competition, and hopes to attract foreign investment to ensure that, by bolstering one of the smaller players such as Wind and Mobilicity. While these were encouraged to enter the market by auction rules which set aside some spectrum for newcomers, they have struggled to survive against the three incumbents ‘ Bell Canada, Telus and Rogers.
Verizon has held exploratory talks with Wind Mobile investors, including controlling holder VimpelCom of Russia, according to the report, but AT&T, Vodafone and Telenor could also be interested. Wind and Mobilicity have failed to turn a profit so far and Mobilicity’s attempt to sell itself to Telus was blocked by the government in the attempt to preserve alternative competitors.
The administration has recently relaxed foreign ownership restrictions to aid its cause but nonetheless, the sale of Wind by VimpelCom has been delayed by national security concerns. If Verizon acquired either Wind or Mobilicity it could then participate in an upcoming spectrum auction, creating greater competition and potentially driving up prices for incumbents (and the Canadian treasury).
Meanwhile, AT&T has in past years pulled back from mobile presence in Latin America and other countries, but this year it has been at the center of many reports that it is looking to extend its reach. Investments in India or Africa have been mooted, and even an alliance with Verizon to take over Vodafone. The latest talks concern another Europe-based giant, Telefonica, whose shares rose by the largest amount in three months after Spanish newspaper El Mundo said that AT&T had made a takeover approach.
Telefonica denied the rumor but El Mundo said AT&T offered €70bn plus an agreement to take on €52bn of debt, with its main interest being in Telefonica’s extensive Latin American holdings. However, the Spanish government is said to have blocked such a deal on the basis that its incumbent telco is strategic to the national economy.
‘A potential takeover by AT&T wouldn’t be totally crazy as the company showed an interest in Europe and it holds a comfortable financial position and it is trading with a large premium versus European telecommunications companies,’ Andres Bolumburu, an analyst at Banco de Sabadell, told Bloomberg. ‘However, the deal would just be very unlikely because the government can’t afford to lose such an emblematic and strategic asset.’
Spain’s industry minister Jose Manuel Soria said in a television interview that he met AT&T’s chairman at the Mobile World Congress in February, but ‘he told me he had an interest in Europe, but he didn’t say a single word to me on any interest in a bid for Telefonica’.
Telefonica, at least, has the assets in place to be a quad play provider in many markets, including Spain and most Latin American territories ‘ and potentially in the UK, if its O2 unit gets closer to former parent British Telecom again, as many expect. The same is not true of Vodafone, which for years saw its lack of legacy wirelines as a benefit, but is now scrabbling to secure fixed and content companies or partnerships. It has approached Germany’s largest cableco, KDG (Kabel Deutschland Group), but will face rivalry from Liberty Global, while the UK firm is also reported to be interested in Italy’s Fastweb.
Vodafone may be able to afford several acquisitions if, as widely expected, its sells its 45% stake in Verizon Wireless for an estimated $100bn. But while that deal would generate cash, it would also make it essential for Vodafone to offset the loss of US revenues, with growth in Europe and emerging markets. Bloomberg reports that the giant has already made two informal approaches for Fastweb, one this year and one in 2011, which were rejected by current owner Swisscom. Fastweb has 1.86m broadband access lines and is in the process of expanding its fibre optic network.
Meanwhile, it may face a showdown with Liberty in Germany. The giant group wants to consolidate its cable holdings across Europe and add wireless elements via cellco purchases, MVNO deals and Wi-Fi hotspot networks (see inset for Liberty’s ambitions in Ireland). As we went to press, Vodafone was reported, by Bloomberg and others, to have raised a preliminary offer for KDG, to match that of Liberty Global, at €85 a share, valuing the company at €7.5bn. However, Liberty may just be posturing, since it appears to be in no position to complete a takeover – its cable properties in Germany, Unity Media and Kabel BW (now trading simply as Unity Media) have been prevented from merging with KDG on at least two occasions before, with the German antitrust authority, the Bundeskartellamt, refusing to let the majority of the cable in teh country being controlled by one firm.
Liberty may be hoping for a change in regulatory stance. Its CEO, Mike Fires, has asked why Deutsche Telekom is allowed to operate all over the country, when no cable company is so allowed? But for now, the Bundeskartellamt clearly does not want to create an artificial second player in fixed broadband as well as pay-TV, and potentially in fixed voice too. In effect, it would restrict competition in three separate but related markets, in a single transaction.
That’s why the regulator forced Deutsche Telekom to divest itself of all the major cable companies 11 years ago, and did not allow Liberty to purchase all of those cablecos in 2002. Nor did it permit a freshly public KDG to buy the other two majors in 2009. Even as recently as a few months ago it would not sanction the purchase of the 2m cable homes owned by fourth placed minnow, Tele Columbus, by KDG. A preferred option for the antitrust agency would be for Unity Media to buy Tele Columbus, to create two major cable monoliths with around 8m homes each, which could potentially join forces on MVNO and Wi-Fi deals and create real alternatives to DT.
The more likely outcome now is that Vodafone will get KDG. A piece in the London Financial Times suggested that Liberty thinks it can get over regulatory issues by putting its own German assets into KDG in return for shares in the public companies. But Vodafone will offer a straight cash deal, far more attractive to shareholders.
There is also a mobile angle, with Vodafone possibly able to oust Telefonica as KDG’s MVNO partner. That could influence the antitrust body, since in the German mobile space, Vodafone is in a strong second place to T-Mobile while the third cellco, E-Plus, has no fixed lines (O2 is in fourth position). However, if Liberty does not top Vodafone’s price again, the UK company is likely to get its prey after some haggling with the regulator ‘ and then will be free to take its Liberty battle elsewhere, perhaps even the UK, where Liberty owns the largest cableco, Virgin Media. If Vodafone does sell its stake in Verizon Wireless and use some of the proceeds for fixed line acquisitions, its eye will perhaps light on the incumbent in its home country, BT ‘ and that would precipitate a whole new wave of deals in Europe, and some legal and political shenanigans on a part with those across the pond.