Opportunities for deals in the telecommunications sector during the COVID-19 era
The new scenario makes it increasingly urgent to transform operations and customer interactions, both in consumer and enterprise segments
In the times of the Covid-19 some telecom market deals have been shelved or delayed, while some others keep on moving forward regardless of the new scenario. As privileged spectators of the telecommunications industry, at Nae, we believe that many Telcos will emerge stronger from the crisis and that good investment opportunities will be opened, in the heart of some deep business transformations that the market demands.
In this white paper we offer an analysis of the new scenario and the main opportunities.
Telecommunications have become essential during times of crisis
In recent weeks, a strong focus has been placed on an industry whose infrastructures and services play an essential role in running the digital ecosystem that supports society and the global economy in order to handle the challenges posed by the COVID-19 crisis throughout the world. We can confirm that overall, telecommunications infrastructures are holding up and the telecom industry has the chance to emerge stronger from the crisis.
The sector can offer a sense of security to financial markets. It will also be interesting to see the result of the protection measures put into place by governments and how they affect free-market rules. Investors should be mindful of the new role that governments will play and design transactions that are acceptable in the eyes of national regulatory authorities.
However, the unprecedented and completely unexpected scenario created by COVID-19 will have a range of effects on industry companies, depending on their size, business model and other internal and external factors. The networks of large telecommunications providers have been able to absorb the increased demand with relative ease, and their cash flow may improve in the short term. New challenges will emerge as demand and prices eventually drop, and end-user behavior evolves.
In turn, small companies may struggle financially, making them more vulnerable and creating acquisition opportunities for larger telecommunications providers or investors, thereby consolidating the sector at a faster pace.
Another key trend that will bring additional opportunities due to the overall high debt levels of telecommunications providers is the separation between the service and infrastructure layers. Infrastructure companies can grow and strengthen their business by building resilient, capable and secure networks for the rest of the digital ecosystem. At the same time, other companies may be forced to get rid of their infrastructures in order to obtain the resources needed to digitally transform themselves and boost their services.
In any case, the new scenario makes it increasingly urgent to transform operations and customer interactions, both in consumer and enterprise segments.
Telecom trends that already existed prior to the COVID-19 crisis will speed up in the coming months in a race towards digitalization and competitiveness. New opportunities are appearing.
Four initiatives that create value
1. Inorganic growth by acquiring small telecommunications providers
Although the telecom industry as a whole has strong growth and business development prospects, smaller telcos may eventually face serious cash flow issues due to the eventual drop in revenue caused by the crisis.
These telecommunications providers will need liquid capital to recover from the blow and make the necessary investments that will enable them to continue transforming their operations.
This scenario will be an excellent opportunity for certain medium and large-sized telecommunications providers to grow inorganically, although they will need to obtain funding and exceed the telecom industry’s debt levels, which tend to be high.
Other investors will also have the chance to execute transactions that consolidate telcos, which will then be transformed and sold to telecommunications providers once the crisis is over.
2. Infrastructure investments: radio towers, fiber optic networks and data centers
The rising trend of telco carve-outs will continue as a way for large telecommunications providers to obtain liquidity and as a result of pressure exerted by financial markets to separate the network and service layers.
The multiplier effect in the purchase of infrastructures is not expected to fall since these strategic elements are in high demand and of great interest to funds.
There will be growing interest in business models that are solely focused on infrastructures. This process will continue to drive roll-out investments in countries where a shortage exists, even in Europe (e.g, fiber optic networks), aside from Latin America and other regions.
Other elements of the infrastructure roll-out value chain will also benefit and may offer investment opportunities.
3. Investing in the cloud and other technologies that speed up virtualization
Some technologies bring a special activity from the M&A perspective: the latest technological trends, such as network virtualization, have led the way for the emergence of new companies with innovative products and for telcos to completely revamp their operations.
These new companies are usually acquired by large telecommunications providers that have the platform and reach to monetize the product.
This process may continue, and private equity firms will search for medium-sized companies in need of financial support to market their products, and that can then be sold to top industry players.
4. Creating value through digitalisation and restructuring
Aside from these transactions, the telecommunications industry will become increasingly concerned with securing cash flows by implementing lean operations and simplified business models.
Leading telecommunications providers will align their operations and maintain their growth strategies for services by separating infrastructures from services and doubling down on technological transformation.
Among other things, this will drive network virtualization, the roll-out of 5G, the creation of brands with 100% digital operations and the expansion of the IoT.
As a result, many companies will launch extensive transformation initiatives, requiring them to restructure their financing and find new sources in order to carry out their medium and long-term business plans.
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