Three things that will make telecoms companies spend billions of dollars in 2015 and beyond

There is currently a lot of trade activity in the telecoms industry, with many large-scale deals either finalised or pending. The merger between EE and BT is worth a reported £12.5 billion. It was followed by Three and O2 striking a £10 billion deal. The proposed merger in America between Comcast and Time Warner Cable, said to be worth $45.2 billion, will dwarf them both.

All three deals are part of an on-going trend of consolidation in the telecoms industry. A trend that seems to be gathering pace.

“I would expect recent levels of M&A activity to intensify further. Until now much of the consolidation activity has been domestically-focused, but there have been a lot of discussions about cross-border mergers on a much larger scale,” says Christian Goetz, a Partner in BDO’s Frankfurt office.

Along with several other BDO telecoms industry experts, he has worked on the recently released BDO 2015 Telecommunications Risk Factor report.

While the report mainly focusses on the risk factors facing telecoms companies, it also highlights why there is likely to be a rise in telecoms’ M&A activity.

The reasons include:

Non-organic growth is on the rise

As illustrated by the three trades mentioned above, there is an on-going trend of consolidation in the market. Telecoms are all angling to secure their positions in various markets.

I previously spoke to BDO telecoms experts Tom Manion and Christian Götz about how the moves made by telecoms to consolidate their position in specific markets leads them to look at  acquiring infrastructure companies.

Another trend, as highlighted by the EE and BT deal, is mergers between telecoms with different service portfolios in order to create entities that will survive in the future market space where there are likely to be fewer, bigger players, who can offer a wider variety of services. 

It means that we are likely to see a number of mega-deals in coming years, and that telecoms are looking at non-organic growth.

Traditional silos are falling

Another trend driving M&A spending in telecoms is the need to add new offerings that fall outside of ‘traditional’ areas. 

Telecoms are adjusting to the rapid changes in the technology, media and telecoms sphere where traditional silos surrounding industries are rapidly crumbling. It is, in other words, no longer enough to ‘just’ be a telecoms company. 

As I have previously written about here on the blog, the industry is generally moving towards offering quad-play, which leads telecoms to work with other partners in order to find ways of integrating new offerings in order to meet customer demands.

This is by no means the end of diversification. An example of how this is BT’s joint deal with BskyB for the TV-rights to the English Premier League for 2016-2019, which was worth just over £5 billion before the first camera crew even set foot in a stadium. 

Another example is Norwegian telecom Telenor’s recent investment in a web-based bank in Serbia.

The examples are representative of a wider trend of telecoms investing in offerings that would traditionally have ‘belonged’ to media and technology companies. 

Telecoms heading for umbrella-structure

Disruption of traditional industries and offerings is coming thick and fast these days. This also applied to telecoms. One of the consequences is that it is very difficult for telecoms to predict exactly where this disruption is going to come from, or what offerings are going to lead to a disruptive advantage over competitors.

As coined in the telecoms report:

“The companies best prepared to meet this challenge head-on are proactively investing in technology start-ups or developing internal innovation incubators to harness market-leading ideas and technologies. Deutsche Telekom, for example, plans to invest €500 million through its venture capital fund over the next five years.” 

Exactly what Deutsche Telekom wants to invest in will be very interesting to see.

There is a trend of telecoms diversifying, and I believe that some of the areas that we might see them invest in include mobile gaming, mobile payment technology and potentially virtual currencies.

I think that telecoms are trying hard to diversify, and move away a future where they run the risk of becoming little more than data vendors, while at the same time staying true to the fact that this will, in all likelihood, continue to be their prime function.

Funding, finances and fluctuations stand in the way

While certain things have Telecoms companies spending large sums, the international risks associated with liquidity, cash flow, interest rates, currency fluctuations and the like all have a potential negative impact.

Telecoms are generally large, international entities, which leaves them exposed to a number of risks within the international sphere, including fluctuations in currencies and interest rates.

These are two of the factors, which could make for a volatile market and might make some telecoms hesitant to spend.

However, this reluctance will be more than outweighed by the need to spend in order to keep up with rivals in a market that is seeing increased competition.