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Issue 8

Inside Telecommunications

Nurturing new technologies Welcome to the eighth edition of Inside Telecommunications, =rnst  QoungÌs renieo of the most signiÕcant denelohments in the telecoms sector& In this issue, oe consider a number of imhortant themes, from oheratorsÌ neo ahhroaches to innestment funds to the grooing imhortance of trafÕc management and ohtimiration technologies& We hohe qou Õnd this useful& Hlease do not hesitate to share qour feedbacc oith me or anq of mq colleagues at =rnst  Qoung&

Jonathan Dharmapalan Global Telecommunications Leader


Contents

Service innovation

2

4

Technology

8

Regulation

10

Gherators target imhroned call iualitq through high deÕnition voice 4

Eobile trafÕc management and ohtimiration technologies set for growth 8

Contrasting outcomes in shectrum auctions worldwide

Nurturing innovation facilities and funds for new services 6

Gherators and vendors move forward on LTE Advanced 9

Khifting landscahes in hublic sector shectrum release 12

Inside Telecommunications

10

Mergers and Acquisitions

14

Introduction

14

Consolidation underwaq in MK mobile marcet

15

Tower deals mace their hresence felt in =urohe

16

9sian oherators maintain their foreign focus

18

Consolidation and restructuring continues across 9sia%HaciÕc

19

Strong investment ohhortunities remain in the wireless tower marcet

20


Foreword

The last three months of 2012 saw a number of key transactions worldwide as in-market consolidation spurred an increase in deal activity compared with the previous quarter. At the same time, carriers are reconsidering their approaches to innovation as they leverage venture capital and operational capabilities to support technology start-ups.

Adrian Baschnonga Lead Analqst Global Telecommunications Center abaschnonga8uc.eq.com

Imhortant deals announced in the Mnited States and Bahan show that consolidation remains verq much a ceq comhonent of transaction rationale& Gherators are committed to generating scale in core marcet segments, such as mobile, with shectrum holdings acting as an eptra catalqst for tie%uhs& While regulatorq concerns over national shectrum distribution and antitrust issues still rehresent barriers to new marcet structures, there are alreadq signs that holicq macers recognire the beneÕts of consolidation& >or epamhle, in <ecember the EM ahhroved @utchison +GÌs taceover of Grange Austria& At the same time, some oherators, notablq in Asia, remain ceen to ephand their global foothrints in both develohed and emerging marcets& Although moves into adbacent marcet segments are imhortant for manq hlaqers, leading oherators are overhauling their ahhroaches to innovation well beqond aciuiring or hartnering with established heers in other industrq sectors& Gne ceq develohment in recent months is the formation of new venture cahital funds, often in tandem with innovation facilities. Such moves signal the emergence of a shared ahhroach to innovation. Gherators are now ceen to identifq and suhhort hromising technologies and services at an earlier stage while also recogniring that traditional J< ahhroaches Õt less well with new ecosqstems that straddle different industrq verticals or emerging geograhhies where efÕcient routes to innovation are critical. >or their hart, technologq start%uhs can tace advantage of oheratorsÌ networc and marceting cahabilities as theq looc to widen their own addressable marcets. Nevertheless, an enabling environment for innovation in the sector hinges on effective holicies and regulation as much as new investment strategies or hartnering models.

Issue 8

In this light, the Eurohean CommissionÌs list of digital hriorities for *()+Ç*(),, announced in <ecember, is notable for its focus on increasing broadband investment and mapimiring the socio% economic beneÕts of infrastructure roll%out. Nevertheless, even investment-oriented digital holicies are themselves at the mercq of the wider EM commitments, as demonstrated bq the reduced funding for the Connecting Eurohe >acilitq hrobect in the wace of EM budget cuts. <ata hrivacq and hrotection is another shhere where holicq macers are under hressure to align consumer interests with actionable rules for the industrq. Negotiations on uhdated EM data hrivacq regulation are entering a critical hhase, with industrq hlaqers highlighting the need for a reduced regulatorq burden while some member states themselves want more ohtionalitq built into new laws. >urther, fears are growing that new holicies will be unworcable at a global level as different regions seec to safeguard data hrotection in different waqs. Eeanwhile, the hroshect of a new technical standard for <eeh Haccet Inshection <HI! È therebq helhing oherators manage their data trafÕc more effectivelq È has also drawn criticism as a hotential catalqst for bloccing comhetitor services, or increased government censorshih and surveillance. Although hrivacq and securitq issues remain imhortant sector themes, the hace of innovation across the industrq shows no signs of slowing. Ernst & Young’s global telecommunications team attended the GSMA Mobile World Congress in >ebruarq, where oherators and technologq vendors alice showcased an ecosqstem in transformation. An overview of highlights from the event will feature in the nept issue of Inside Telecommunications.

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1

Service innovation

Gherators target imhroved call iualitq through high-deÕnition voice As the mobile industrq continues to focus on the migration to LTE services shurred bq a new generation of smarthhones, it is easq to overlooc the continued imhortance of voice as a core oherator offering. <eshite growth in data revenues, voice is still ephected to account for half of oherator revenues in qears to come. At the same time, one recent surveq shows that drohhed calls are still a serious hroblem for end-users, with /* of MS handset owners epheriencing this at least occasionallq.) Indeed, this lacc of functionalitq is more hronounced for owners of high-end devices, with smarthhone users hrohortionatelq more licelq to cite such issues comhared with feature hhone owners.

Figure 1. US mobile users experiencing dropped calls

Other handset owners

Smartphone owners

0

10

30

Experienced dropped calls at least weekly (%) Source2 ÉMobile Hhone Hroblems,Ê Pew Internet & American Life Project, 2 August 2012.

) ÉMobile Hhone Hroblems,Ê Pew Internet & American Life Project, * August *()*

4

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Inside Telecommunications

40


In this light, operators have been keen to roll out new high deÕnition (@<) voice services in a number of markets. :y October 2012, -1 operators were offering @< voice in 30 countries, representing a .0% increase year-on-year in the number of services available.2 There are competing operators offering @< voice in 11 markets, including Austria, Canada, Croatia, >rance, Holand, Jussia, Slovenia, South Corea, Turkey and the MC. <evice support is also growing, with 12/ models enabled with 3GHH-approved adaptive multi rate wideband technology available through 14 manufacturers.

3

would switch carriers due to poor iuality voice calls. Monetiration of @< voice services is likely to be indirect2 for example, increases in average call duration for @< voice calls can generate higher revenues. @owever, operators are not the only entities raising the stakes in call iuality. NoIH providers, such as Niber, Nimburr and Jebtel, have also taken steps to bring @< voice to different mobile operating systems.

Meanwhile, international @< voice calling has also appeared, with Orange launching a cross-border service for their customers in Jomania and the Jepublic of Moldova in October. Going forward, the >rance-based group plans to offer @< voice as a wholesale offering to other mobile and Õxed operators. The move into @< international voice is an important one, given the in-roads that NoIH providers have made into international calling minutes.

The transition to @< voice is arguably overdue among mobile operators, with improvements to voice codec efÕciency historically made to increase cell capacity rather than the iuality of voice calls. Interoperability issues are improving but still there are obstacles to overcome. Transcoding between different @< voice codecs È for example, between Õxed and mobile operators È will be needed for @< voice services to Öourish further. In this regard, much will depend on the formation of new value chains, with wholesale intermediaries playing a vital role.

>or operators, efforts to improve call iuality offer a new route to combating churn, with @< voice capability offered to end users for free. Clear connections are important to customers2 one survey of MS mobile phone users conducted last year showed that /0%

Competition between different types of service providers will also determine how the market develops2 already both operators and hosted IH H:P providers offer a range of @< voice services for enterprise customers.

2 ÉGSA conÕrms over -0 mobile networks have launched @< Noice service,Ê Global Mobile Suppliers Association, 20 October 2012 3 ÉJebtel :rings @< Noice to iOS and HC Apps,Ê PRWeb, 11 September 2012

Issue 8

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Nurturing innovation facilities and funds for new services Innovation facilities and funds are playing an increasingly important role for operators as they ramp up their investments in adbacent market segments. The Õeld of investment opportunities is widening for carriers as they look to offer new services in order to respond to competitive threats while, at the same, time generating new operating efÕciencies. Aware that they cannot do all of the J&< they reiuire in-house, operators are looking for alternate routes to innovation by seeking out new talent at its source. As such, operators are keener than ever to deepen their relationships with the developer community as they overhaul traditional approaches to J&<. Hartnerships with start-ups in California’s Silicon Nalley have become increasingly important to leading players. In 2011, the likes of Neriron and Nodafone established new innovation centers in order to identify start-ups with potential and take their ideas to proof-of-concept trials. In return, developers gain access to mobile operators’ networks and back ofÕce capabilities. One year after launch, Nodafone revealed in September that its tech incubator È Nodafone xone È had already nurtured a doren tech companies, with participating entities receiving cash through Nodafone Nentures and other resources. Opportunities in speciÕc market segments are prompting other players to ramp up their presence in Silicon Nalley. In November, NTT announced plans to establish a cloud computing J&< center in the region, the Õrst-of-its-kind for the operator outside Bapan. Employing 100 engineers, the new facility will focus on cybersecurity, among other areas. Other developments demonstrate a cross-sector approach to J&<, beÕtting a converging industry. In October, a consortium of mobile operators and infrastructure providers È including Telefonica Europe, @uawei and Samsung È established a -G research center in the MC led by the Mniversity of Surrey, with state funding also supporting the new facility. At the same time, operators’ venture capital strategies are being overhauled in order to keep pace with changing industry dynamics. In September, Telefonica launched Amerigo, a Ò300m network of venture capital funds, which will be open to participation by other companies from both private and public sectors. Interestingly, the initiative is aimed at areas outside of the main centers of venture capital activity, such as Latin America, where technology incubation experience is thin on the ground, yet the demand for service innovation has never been higher.

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Inside Telecommunications


New funds have been established by a number of other players across a growing range of industry sub-segments. In October, NTT <oCoMo revealed plans for a ¬10b fund to nurture early-stage technology and mobile businesses, primarily in Bapan, across a range of industry sectors, including Õnance, healthcare and environment. At the same time, the Bapanese operator announced an ÉInnovation NillageÊ to provide start-ups with resources and knowhow.4 Early in 2013, an additional wave of investment was announced via its US subsidiary, <OCOMO Capital Inc. >ellow Bapanese operator Softbank has followed suit by announcing a US2-0m fund È Softbank HrinceNille Investments È to invest in applications development in areas ranging from social media through to online advertising and cloud computing. Unlike its existing venture arm, Softbank Capital, the new fund will focus on investments in more established players seeking to internationalire their businesses. Operators are also reviewing existing venture capital arms in order to improve targeting and decision-making. In September, press reports suggested that <eutsche Telekom was re-appraising its own venture capital strategy in order to accelerate its moves into emerging market segments. As a result, it allowed its T-Nenture arm to aciuire mabority stakes in start-ups while adbusting the organirational

structure to iuicken the decision-making process for attractive targets. As recent initiatives from operators show, approaches to technology investment are becoming more diverse. There is an increasing focus on both early-stage investment and support for more mature innovators that are seeking global footprints. Meanwhile, holistic strategies that align venture capital approaches with innovation facilities are also becoming more evident. In addition, operators are also partnering afresh with venture capital Õrms2 last year, >rance Telecom and Hublicis Groupe signed an agreement with Iris Capital Management, targeting both start-ups and established companies through the creation of three 6 funds targeting different geographies. These developments demonstrate how operator approaches to technology investment are shifting to keep pace with the times. <ecentralired J&< is becoming more important as operators widen their addressable markets, while the potential of developing markets is driving the creation of new venture capital funds. Meanwhile, existing incubator networks are being accelerated, reÖecting both the emergence of new innovation Ëhot spots’ in the wake of convergence along with a greater onus on effective decision-making to make the most of global opportunities.

Figure 2. Selected operator innovation funds Launch

Operator

Innovation fund

Fund value

Notes

>eb 13

Soft:ank Corp.

Soft:ank HrinceNille Investments

US2-0m

Set up through existing fund Nenture Capital3 to be run in conbunction with Softbank afÕliate and semiconductor Õrm MediaTek.

>eb 13

NTT <oCoMo

-00 Startups II, L.H. via <OCOMO Capital

¬10b

Hlanned investment in -00 start-ups II via NTT’s U.S. subsidiary NTT Capital Inc.

Oct 12

NTT <oCoMo

<OCOMO Innovation >und and Innovation Nillage

¬10b

>ocused on mobile services in Bapan across eight new strategic Õelds2 media'content, Õnance'payment, commerce, healthcare, M2M, aggregation'platforms, environment, security'safety.

Oct 12

Telenet Group

Telenet STAH

Ò30m

>ocused on investment in >lemish language content for TN services over a four-year period

Sep 12

Telefonica

Amerigo

US300m

A Latin America-focused fund that will be combined with Telefonica’s growing network of Wayra incubators, targeted countries include Spain, Colombia, Chile and :raril

Bun 12

SK Telecom

SK Group >und"

US0-m

A private eiuity fund for direct investment with partner companies in small companies struggling to raise capital.

Source2 Ernst & Young analysis. 4 É<OCOMO to Nurture Growth via New Nenture >und and Incubation Hrogram È >ocusing on business models, technologies and services centered on mobility,Ê NTT DOCOMO, 2. October 2012 - É<eutsche Telekom Jevamps T-Nenture Strategy After Slow Start,Ê Bloomberg, 4 September 2012 . É>rance Telecom Orange and Hublicis Groupe Hartner with Iris Capital Management to create a leading European Nenture Capital Investor in the digital economy,Ê France Telecom, 12 March 2012

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2

Technology

Mobile trafÕc management and optimiration technologies set for growth Spend on technologies that help mobile operators optimire their management of data trafÕc is expected to rise sharply in 2013. According to forecasts from A:I Jesearch, the mobile market for policy service, deep packet inspection (<HI) and web'video optimiration is expected to total US2b in 2013, up 42% year-on-year.7 Growth credentials also appear strong in the medium-term2 by 2017, the overall mobile monitoring and optimiration market is set to be worth US0b, with policy, <HI and content optimiration accounting for almost three-quarters of the total. As operators focus on improving Iuality of Experience (IoE), vendors are broadening their service propositions. This is placing a greater premium on <HI tools as a way of gaining greater visibility into the trafÕc Öowing over networks. Looking ahead, <HI technologies will underpin operators’ efforts to monetire trafÕc È and vendors are supporting this growing focus by integrating real-time charging and subscriber analytics to their existing solutions.

As it stands, many mobile operators are already timing <HI investments to coincide with the migration to LTE technology, which is seen as the ideal time to enable tiered service propositions. In time, <HI tools are expected to push further from the level of networks to devices themselves, enabling service providers to provide different levels of service and network control depending on the access terminal. As such, the wireless segment of the <HI market will outpace Õxed-line in growth terms in the years to come. While operators are still largely concerned with trafÕc management approaches so as to minimire risks emanating from fast-rising mobile data demand È there is growing interest in integrating different monitoring solutions, such as <HI and video optimiration, as part of more holistic solution sets that aid new types of customer experience while also supporting new network architectures, such as softwaredeÕned networks (SON). Meanwhile, the rise of shared data plans È where data is

7 ÉMobile Policy, DPI, and Web'Nideo Optimization Market To Jeach $2 :illion in 2013,Ê ABI Research, 2 November 2013

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Inside Telecommunications

shared between subscribers or devices È is likely to spur additional operator investment in Öexible policy management solutions. Figure 3. Global mobile policy, DPI and web/video optimization market forecast

US$b 2.0 1.5 1.0 0.5 0 2012

2013

Mobile policy, DPI and video optimization Source: ÉMobile Policy, DPI, and Web'Nideo Optimization Market To Jeach $2 :illion in 2013,Ê ABI Research, 2 November 2013.

<espite the positive prognosis for investment in network monitoring and optimiration solutions, challenges remain. Hrivacy concerns are rising in tandem with the new techniques that help determine the


types of content consumed by users. In December, the International Telecommunications Union (ITU) approved a new standard for DPI designed to help ISPs manage network trafÕc more efÕciently, thereby improving quality of service. @owever, civil liberties groups have argued that such moves could encourage surveillance as much as aid service differentiation. The US-based Center for Democracy and Technology has since argued that privacy implications as well as technical considerations should form part of the standardization process for DPI technology. At the same time, negative connotations concerning net neutrality also dog the debate on improving IoE. Looking ahead, clear deÕnitions, agreed use cases and ongoing customer assurances will prove integral to the fast-evolving market for network optimization.

Operators and vendors move forward on LTE Advanced With the number of commercial LTE networks worldwide now past the one hundred mark, industry players are already turning their attention to the potential for LTE-Advanced technology. Also known as LTE Jelease 10, it reportedly offers three times the spectral efÕciency of LTE, while offering speeds of up to 1Gbps on the downlink and 500Mbps in terms of uploads.

Already operators are outlining plans to offer LTE Advanced services in 2013, with Jussia’s Yota the Õrst to launch a network in October 2012. Statements from the Moscow-based operator and its vendor, @uawei, described the network as both a commercial and test network, which can achieve downlink peak rates of 300Mbps, depending on the capacity of the radio channel.0 In December, T-Mobile Austria was reported to have tested LTE Advanced technology using a test network in the 1000M@z and 2.6G@z bands to reach data throughput of 201Mbps using carrier aggregation.9 Other operators are also limbering up to roll out the latest iteration of LTE technology. :ack in 2011, US carrier AT&T announced plans to deploy LTE-Advanced from the second half of 2013, and a number of other operators in North America and Bapan have intimated their LTE Advanced intentions. Nendors are also upping the ante: following Huawei’s launch with Yota, Ericsson announced that it had demonstrated LTE Advanced for TDD for China Mobile in November. Despite these pockets of progress in terms of testing future iterations of LTE, standardization for next-generation mobile technologies as a whole remains a work in progress. Some headway has already been made by the ITU, which in Banuary approved speciÕcations for IMT-Advanced. This umbrella category refers to more than one technology È both LTE-Advanced and WirelessMAN-Advanced, which is an evolution of the 002.16e technologies used for mobile WiMAP. IMT-Advanced also features new techniques for sharing network resources, thus supporting more users per cell, as well as global roaming and seamless handover capabilities. In this light, the move towards more sophisticated mobile network technologies involves far more than gains in data throughput. Meanwhile, other standardization bodies, such as 3rd Generation Partnership Probect (3GPP) and Institute of Electrical and Electronics Engineers (IEEE) will also need to help cement new mobile standards so that vendors and operators can build and deploy new equipment. 0 ÉYOTA Networks and @uawei Launch World’s >irst LTE-Advanced Commercial Network,Ê Huawei, 24 October 2012 1 ÉT-Mobile tests LTE Advanced technology in Austria,Ê Telecompaper, 17 December 2012

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3

Regulation

Contrasting outcomes in spectrum auctions worldwide Spectrum auctions continued apace in the fourth quarter of 2012, with a number of auctions taking place. However, results also challenged current notions as to the value of new spectrum, with industry predictions proving out of line with the results in some cases. In the Netherlands, GSM licenses in the 900MHz and 1000MHz spectrum bands were up for renewal in December, while new spectrum was also made available for 3G and 4G services at 000MHz and 2.6GHz. In total, some 41 separate spectrum licenses È equivalent to 300MHz of airwaves È were up for grabs, making it the largest sell-off in Dutch history. A reserve price of Ò470m had been set, yet the auction ended up generating eight times that amount, with a total of Ò3.0b paid. Not only did the bidding exceed expectations but also the competitive environment in the mobile sector altered substantially: Tele2, which has acted as a mobile virtual network operator, received signiÕcant spectrum in the 000MHz band that is well suited for cost-effective 4G network rollout. That the regulator had

10

reserved one-third of the 000MHz band for a new entrant underscored how the auction was seen as a route to increased competition levels, with a boint venture between two Dutch cablecos, UPC and Ziggo, also entering the bidding for this in-demand band that helped drive up the prices. While it is not possible to break down the prices paid per band, the overall price per MHz per inhabitant stood at Ò0.65. This is in line with European averages for the 000MHz band, despite the fact that six other frequency bands È which typically generate much lower prices È were also on offer in the Netherlands. As such, the Dutch auction represented by far the highest prices yet paid for 4G spectrum. >ollowing news of the result, the share prices of all Dutch mobile players dipped, revealing bust how closely entwined spectrum costs and mobile operator fortunes are for investors. In November, Irish regulator ComReg revealed that Ò055m had been raised through its multi-band auction of 4G licenses. Three of the country’s four existing players acquired new holdings

Inside Telecommunications

in the 000MHz band, while all four were awarded lots in both the 900MHz and 1000MHz bands. As with the Dutch auction, the licenses run until 2030, with payment split between upfront fees of Ò401.7m and Ò372.9m paid in annual installments for the duration of the license period. Under the obligations of license conditions, all operators must provide minimum population coverage of 70% within three years of receiving the new licenses. The auction itself exceeded expectations, with the total Õve times more than expected. Other auction results during this period demonstrated how the availability of sub1GHz spectrum is catalyzing higher prices. In November, the Norwegian auction of 2.1GHz spectrum was concluded in a single round, with three operators È Telenor, TeliaSonera and Mobile Norway È paying the reserve price of NKr5m per block, which means that they have equal spectrum holdings in this band. Originally, there had been Õve bidders but two of them withdrew ahead of the auction.


The November auction of 2G airwaves in India produced only a lukewarm response from mobile operators. >ive players received bandwidth in an 1000MHz auction that generated INR 94.1b (US$1.71b), equivalent to one-third of the reserve price. The auction followed a Supreme Court order earlier in 2012 which canceled the licenses of existing players after ruling that the Õrstcome-Õrst-served policy underpinning the original distribution of spectrum was unlawful. This decision undermined India’s credentials as an investment destination, hurting operators and vendors alike as capex commitments were scaled back. The lackluster showing at this most recent auction was predicated by a number of factors. Chief among them is the high reserve price, which was derived using prices paid for 3G spectrum and was nine times higher than the 2000 2G spectrum sale price. At the same time, other uncertainties surrounding the potential to refarm spectrum and additional fees for excess spectrum also undermined operators’ willingness to bid. Ultimately, the need to narrow the country’s Õscal deÕcit may have informed the prohibitively high reserve price3 this, in turn, highlights how industrial policies should be budged on sector-speciÕc merits. Another auction is slated to take place in March 2013, offering airwaves in the four circles that did not attract bidders in November, as well as spectrum held by incumbents in the 900MHz band in metro areas that are set to expire in 2014. Reacting to the underwhelming response to the November auction, the government has approved a 30% cut in the reserve price for the

sale of 1000MHz spectrum in the four zones of Delhi, Mumbai, Karnataka and Rabasthan. Nevertheless, industry bodies have pressed for additional cuts to the reserve price, also arguing that reductions should be extended beyond circles that saw no bids made. These contrasting auction outcomes in different markets demonstrate that spectrum release is a key determinant of the long-term health of the mobile industry. Government assumptions should be realistic, while auction designs have to cater to the needs of new entrants as well as established players. Such concerns are particularly acute given the multi-band auction frameworks favored in some markets. Figure 4. Prices paid in selected Q4 2012 spectrum auctions

€m 4,000

3,000

2,000

1,000

0

India Reserve price

Netherlands

Ireland

Total amount paid

Source: Ernst & Young Analysis3 ÉIndia Telecom Spectrum Auction Generates $1.71 :illion,Ê Wall Street Journal, 15 November 2012.

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Shifting landscapes in public sector spectrum release Spectrum release policies are gaining attention worldwide as governments and regulators look to secure sufÕcient spectrum for mobile broadband over the next decade. While 000MHz and 2.6GHz spectrum auctions continue apace in many Western markets, policy makers are also turning their attention to higher frequency bands held by the public sector as they review national spectrum holdings in their entirety. Airwaves held by the military are proving particularly appetizing. In December, the UK’s Ministry of Defence (MoD) announced plans to auction some of 200MHz of radio spectrum under 15GHz in 2014. The MoD holds three-quarters of the UK’s publicly-held spectrum, of which a third lies under the 15GHz mark. Other public sector entities with signiÕcant spectrum holdings include emergency services and transport authorities. Previously, the UK Government had promised to release an additional 500MHz of spectrum under 5GHz over a ten-year period to cope with fast-rising demand for mobile broadband. The MoD’s move forms a pivotal part of a long-term policy designed to boost the availability of 4G services, which, in turn, will help bridge the digital divide. Other recent news Öow has also highlighted the importance of new spectrum for public sector entities given the enriched diagnostics and communications capabilities inherent in LTE services. In October, the Australia Communications and Media Authority (ACMA) conÕrmed that national emergencies would be given 5MHz of dedicated paired spectrum in the 000MHz band to operate a LTE network, less than the amount originally requested.

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Inside Telecommunications


>ollowing this move, New Zealand’s :usiness, Innovation and Employment Ministry revealed in November that it was weighing up a similar approach to safeguarding digital dividend spectrum for emergency services use. In the same month, Argentina’s federal government announced plans to auction 4G spectrum, while at the same time underlining that it would retain a signiÕcant quantity. This followed the cancellation of a national 3G spectrum auction in September, with frequencies handed instead to federal communications company Arsat, which now holds 20% of Argentina’s available 3G spectrum. Looking ahead, the primary challenge for policy-makers is that long-term spectrum release agendas require careful co-ordination if appetite for new airwaves is to prove sustainable. In the case of military spectrum release, it is worth noting that many of the blocks set for release are in very small blocks, suggesting speciÕc use cases, such as M2M monitoring services.

At the same time, balancing private and public sector demands for new spectrum is challenging, as highlighted in Australia where safeguarding public sector spectrum for LTE requires buy-in from local government as well as public safety agencies. Timing issues also need to be addressed: the prospect of repurposed public sector spectrum may undermine other auction processes, for example. Nevertheless, use cases are now widening to include whitespace and backhaul services, which may offset the risk of ÉcannibalizationÊ of spectrum demand. In addition, the opportunities deriving from new frequency bands will, in part, hinge upon levels of support from vendors in terms of network equipment and compatible devices.

Figure 5. Weighted use of public sector spectrum holdings in the UK

Business radio, 6

Emergency services, 2

Cellular, 4 Other, 7

Defense, 30

Aeronautical & maritime, 14

Science, 1

Broadcasting, 13

Fixed/Satellite, 24

Source: ÉSpectrum >ramework Review for the Public Sector,Ê Ofcom, Banuary 2000.

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4

Mergers and Acquisitions

Introduction The last three months of 2012 saw a surge in deal activity, which totaled US$47.0b for the quarter, up 101% on the deal value registered in I3 2012. Bapan-based Softbank’s US$20.1b bid for US operator Sprint accounted for the lion’s share of the disparity. There were 160 deals accounted, up from 100 in the preceding quarter, with average deal value standing at US$294.0m. In terms of deal activity by region, Bapan led the way on account of both Softbank’s move into the United States and two other sizeable transactions È mobile operator KDDI’s stake increase in domestic cable operator Bupiter Telecommunications and Softbank’s acquisition of domestic rival eAccess. The US was the scene of the quarter’s second-largest deal, the merger between US mobile operators T-Mobile and MetroPCS announced in October, while Sprint’s announcement that it was taking full control of mobile data network provider Clearwire for US$2.2b was the sixth-largest deal during the quarter.

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Figure 6. Telecoms deal value by area, Q4 2012

Japan

Americas

EMEIA

Asia-PaciÕc

$25,148 $51 $14,655 $4,121 $5,499 $4,865 $2,383 $14,807 Q4 2012

Q3 2012

Source: Ernst & Young analysis.

Deal-making by Asian operators was more subdued than in the preceding quarter, the highlight being China Unicom’s acquisition of Õxed-line assets in Southern China from its parent company for US$1.9b. Deal activity in Europe, the Middle East, India and Africa was broadly in line with I3 2012. Stand-out deals included Liberty Global’s bid for the remaining stake in Telenet Group, which provides quadruple-play services in Belgium, for US$2.6b. This followed its US$2.26b deal to acquire a 49.6% stake in September 2012.

Inside Telecommunications

Meanwhile, Russian mobile operator MegaFon ramped up its retail presence through the acquisition of a 50% stake in retail chain Euroset, which has a footprint of 5,500 stores in Russia and Belarus. The acquisition was made through Lefbord Investments, in which MegaFon has a 50% stake, and is valued at US$1.07b, with an additional US$100m payable if the retailer meets certain targets going forward.


Figure 7. Top telecoms M&A by deal value, Q4 2012 Buyer/Target

Deal value ($USm)

Softbank/Sprint

$20,140

MetroPCS/T-Mobile USA

$3,690

KDDI/Jupiter Telecom

$2,691

Liberty Global/Telenet Group

$2,595

Softbank/eAcess

$2,266

Sprint/Clearwire

$2,156

China Unicom/Unicom New Horizon Telecom

$2,156

Berkshire Partners/Lightower Fiber Networks & Sidera Networks

$2,000

Bain Capital/Telefónica Atento business MegaFon/Euroset

$1,345 $1,170

Source: S&P Capital IQ, accessed January 2013.

Consolidation underway in US mobile market It was a very busy quarter for North American players, with US$26b worth of transactions announced by US mobile operators between October and December. Japan-based Softbank’s acquisition of a 70% stake in number three US mobile operator Sprint was the largest telecoms deal of 2012 at US$20.1b È and the largest-ever overseas acquisition by a Japanese company. The deal, announced in October, immediately provides a much needed capital inbection to Sprint’s balance sheet, roughly US$8b in cash. This will help drive

network modernization alongside strategic investments. At the same time, Softbank’s expertise in smartphones and mobile data technology can be leveraged in the world’s leading LTE market in terms of subscribers. However, this sizeable transaction comes amid a backdrop of consolidation within the US mobile market. Also, in October, T-Mobile USA announced a reverse merger with prepaid mobile operator MetroPCS, the country’s number Õve provider. The transaction will give the new company a deeper spectrum position, while also paving the way for the MetroPCS brand, which provides Öat-rate mobile data services for prepaid users, to expand its presence in the US market. Network-based synergies are also important: T-Mobile plans to incorporate MetroPCS’s existing LTE network within its own planned 4G rollout, while refarming its smaller competitor’s 1900MHz CDMA spectrum for HSPA# services.

Issue 8

15


Sprint itself also made a US$2.2b bid in December to acquire the remaining stake that it did not already own in Clearwire, the specialist mobile data carrier. On the back of this acquisition, Sprint would be the leading owner of mobile spectrum in the US, with combined holdings of 184MHz, more than double the amount held by its closest rivals. Nevertheless, the 2.5GHz frequency band in which Clearwire holds spectrum is ill-suited to providing long-range and in-building coverage, meaning that Sprint may have to invest further in cell towers to make the most of its enlarged spectrum haul. At the same time, device support for the 2.5GHz band is lacking, which creates a further set of challenges in terms of time-to-market. However, in November, Sprint acquired certain assets from smaller rival US Cellular in Midwest markets, including 20MHz of spectrum in the 1900MHz band and 585,000 subscribers for US$480m. The acquisition will boost its presence in the region but, most importantly, will bring new LTE spectrum holdings at a time when rivals are also aggressively expanding their holdings of 4G frequencies. The US mobile transactions announced during the fourth quarter signal far-reaching change in the competitive landscape, as the need for spectrum drives smaller players to seek greater scale. However, following the collapse of the proposed AT&T and T-Mobile tie-up in 2012, regulatory approval is by no means certain. Even so, the fact that smaller players are driving this spate of deals is likely to sit better with regulatory demands that competition levels be safeguarded in the mobile market. At the time of writing, the US Department of Justice had reportedly asked the Federal Communications Commission to defer the tie-up between Sprint and Softbank in order to review the proposal for national security, law enforcement and public safety issues.10

Tower deals make their presence felt in Europe Tower deals remain an enduring feature of transactions. The transactions landscape and Q4 2012 saw a number of deals struck worldwide as operators look to free up cash by divesting non-core operations and tower companies take advantage of favorable borrowing conditions. In recent quarters, a number of deals have taken place in Africa and the Americas Ă&#x2C6; in the last three months of 2012, some important transactions also took place in Europe.

10 Ă&#x2030;DOJ Asks FCC to Defer Action on Softbank-Sprint Merger,Ă&#x160; Bloomberg, 30 January 2013

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Inside Telecommunications


In November, KPN sold 2,000 of its mobile towers in Germany to US-based American Tower for US$501m. The Dutch incumbent said it expects to book a proÕt of about US$127m from the sale and will use the cash proceeds to speed network rollout at E-Plus, it’s German mobile subsidiary, and improve its net debt position. The transaction follows the sale of a large portion of KPN’s mobile towers in the Netherlands between 2008 and 2012. For American Tower, the deal forms part of an ongoing strategy to grow its footprint inorganically, representing its Õrst foray into Germany. In addition to extensive holdings in the US, the company also operates towers in Brazil, Chile, Colombia, Ghana, India, Mexico, Peru, South Africa and Uganda. In the same month, French mobile operator Bouygues Telecom announced it was selling 2,166 towers to Antin Infrastructure Partners for US$266m. The number three operator will use the proceeds È estimated at €185m È to invest in its business and pay down debt. Some 1,873 towers have already been handed over to Antin, with the remainder set to be transferred by the second quarter of 2013. Antin is establishing a company called France Pylones Services (FPS) to own the towers and rent capacity to all French operators, with Bougyues announcing it will take a 15% stake in the business.11 The deal comes at a time when all operators are feeling the effects of severe price competition in the French market. Tower deals remain in evidence in developing regions too. In December, US-based SBA Communications announced it was acquiring 800 towers from Nivo, Telefonica’s Brazilian subsidiary, for US$178m. Telefonica also sold 405 Chilean towers to Perubased Torres Unidas for an undisclosed amount. Africa remains an important source of tower deals. In October, towerco IHS Nigeria entered into an agreement with MTN to acquire 1,758 base stations in Cote d’Ivoire and Cameroon for a consideration of US$284m. Already present in Nigeria, Ghana, Sudan and South-Sudan, this latest acquisition expands IHS’s country footprint while also increasing its sites under management to 5,500, of which 3,000 are owned.

11 ÉBouygues Telecom Sells 2,166 Telecom Towers To Antin Infrastructure Partners,Ê Bouygues Telecom, 26 November 2012

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Asian operators maintain their foreign focus Larger Asian telcos remain in footprint expansion mode, particularly as they eye opportunities in adbacent TMT market segments. Softbank’s move into the US market was the quarter’s most eye-catching deal, yet there were plenty of cross-border moves within Asia. Niettel Global, the overseas arm of military-run Niettel in Nietnam, was selected as the third mobile operator in Cameroon in December, with plans to invest US$400m in a national network. The central African country becomes part of a growing roster of developing markets in Niettel’s footprint, which includes Cambodia, Haiti, Laos, Mozambique and Peru. Korea’s KT continues to seek leverage growth opportunities abroad, announcing in December that it had submitted a preliminary bid for Nivendi’s 53% stake in Moroccan incumbent Maroc Telecom. This marks its second attempt to gain a foothold in Africa, having attempted to take a minority stake in South African incumbent Telkom earlier in the year. Going forward, the Korean incumbent hopes it can leverage its expertise in IT consulting and mobile content in markets that are at an earlier stage of penetration growth. Japan’s NTT has been highly active in recent quarters and made two acquisitions in Q4 2012. Its mobile subsidiary NTT DoCoMo acquired a 19% stake in Rsupport Co. Ltd, a Korean provider of remote IT support services, while NTT Data Business Solutions acquired Australia-based SAP Partner, Innogence, for an undisclosed sum in December. This move forms part of a broader plan to create the region’s largest SAP business analytics and database technology provider. >a_mj]0&Lghl]d][gekE9af9kaY%HY[aÕ[$I,*()*

Date

Bidder

Target

Stake (Value)

Business nature of target

21 Dec 2012

SK Telecom (South Korea)

SK Marketing & Company

50% (US$178m)

Marketing and effective communication services

13 Dec 2012

Axiata Group (Malaysia)

Latelz Co. Ltd. (Cambodia)

90% (US$163m)

Mobile operator

12 Dec 2012

NTT Data Business Solutions (Japan)

Innogence (Australia)

NA

SAP business analytics

11 Dec 2012

NTT DoCoMo (Japan)

Rsupport Co. (South Korea)

19% (US$13m)

Remote support service for computer systems

27 Nov 2012

NelaTel Global Communications (US)

China Motion Telecom (HK) Limited (Hong Kong)

100% (US$6m)

MNNO business

21 Nov 2012

China Unicom (China)

Unicom New Horizon Telecommunications (China)

100% (US$1,953m)

Company operating Õxed-line telecoms network assets

24 Oct 2012

Telstra Corp (Australia)

Adam Internet Pty (Australia)

100% (US$52m)

Internet service provider

15 Oct 2012

Softbank Corporation (Japan)

Sprint Nextel Corp (USA)

70% (US$35,544m)

Wireless communications service provider

5 Oct 2012

Softbank Corporation (Japan)

Avex Entertainment Inc. (Japan)

40% (US$38m)

Music recording company

1 Oct 2012

Softbank Corporation (Japan)

eAccess Limited (Japan)

100% (US$4,436m)

Wireless operator counterpart

Source: Mergermarket, Telecom Asia, Factiva. 18

Inside Telecommunications


Consolidation and restructuring continues across Asia PaciÕc While footprint expansion remains a key sector theme in Asia, consolidation is also playing an important role in sustaining industry growth. In both developed and developing markets, operators are improving their market positions and exploiting cost synergies by acquiring rivals. In December, Malaysia’sAxiata Group acquired 90% of number two Cambodian mobile operator Latelz Co. Ltd for US$155m to merge it with its existing Cambodian business, Hello Axiata. Market share gains and improved spectrum holdings in Japan also underpin Softbank’s US$2.3b acquisition of domestic rival eAccess. The combination of the two businesses will create a clear number two in the Japanese mobile market, while also giving Softbank access to e-Accesses spectrum holdings and base stations in the 1.7GHz band. Consolidation remains a feature of the Australian market, as established players target speciÕc customer segments. In October, Telstra announced the acquisition of Adam Internet, a regional low-cost retail broadband provider that comes with Õber assets and a data centre. The Australian incumbent plans to retain the ISP as a separate brand and stand-alone entity, while targeting growth at a national level for customers who favor online sales and support. However, the Australian Competition and Consumer Commission (ACCC) has expressed concerns about the deal’s potential to undermine competition and has deferred an approval plan until 2013.12 The prospective tie-up is the latest in a spate of deals in Australia’s ISP market. Meanwhile, restructuring needs are proving increasingly central to operators in the Asia-PaciÕc region, particularly those who have extended their service capabilities. In November, China Unicom acquired its parent company’s Õxed-line assets to drive operational and management efÕciencies, while Korea’s SK Telecom plans to merge two subsidiaries È SK Planet and SK Marketing & Company È to streamline its business and combine overlapping products, such as location-based shopping and online services.13

12 ÉTelstra-Adam takeover decision delayed again,Ê Zdnet, 29 January 2013 13 ÉUnits’ merger signals SK restructuring,Ê Korea Herald, 5 December 2012

Issue 8

19


Strong investment opportunities remain in the wireless tower market Think of infrastructure investment and dams, roads and runways probably come to mind. But some of the most promising infrastructure investments for the 21st century may involve a ubiquitous yet largely invisible structure: the cell phone tower. With six billion mobile users worldwide, according to Mfal]\FYlagfkÕ_mj]k$Yf\eYfq networks in the process of an upgrade, either from 2G to 3G, or 3G to LTE/4G, the cell phone tower represents a growing opportunity, according to Rhys H`addah$;`a]^;gee]j[aYdG^Õ[]j$ IHS Group. Previously the Head of Transaction Advisory Services for the telecommunications sector at Ernst & Young, Rhys has acted as lead advisor on many tower transactions in Africa over the last few years.

20

Inside Telecommunications

Critical infrastructure considerations ÉThese are investments in a fundamental piece of a country’s infrastructure, vital for trade, inter-governmental relations and the social fabric of a nation. Contracts are long È 10Ç15# years È and the cash Öows are predictable,Ê says Phillip. The stability of those assets and the general reliability of the counterparty È the larger mobile network operators (MNO) È combined with the material growth potential in many markets, make it possible to design a variety of investment opportunities to suit the needs of particular investors, including long-term holds and three-to-Õve year private equity deals with an exit through IPO to trade of secondary buy out. The largest tower businesses are based in the US where the likes of American Tower, Crown Castle and SBA Communications have been growing since the late 1990s. India has also spawned a number of signiÕcant tower businesses such as Indus, created by three of the country’s operators combining their assets. In Africa È a younger market for tower investments È a


number of tower companies have arisen, the most successful of which to date has been IHS group, based in Nigeria but which has secured the tower assets of MTN in Cote D’Ivoire and Cameroon on a buy-andleaseback basis.

A range of industry and kg[ag%][gfgea[Z]f]Õlk ÉThe beneÕts to operators of outsourcing towers, the network’s passive infrastructure, are clear,Ê says Rhys Phillip, continuing, ÉA sale-lease back of their towers Õrstly provides a lump sum of cash at the beginning of the contract that can be returned to shareholders or invested in the customer proposition. Secondly, it reduces their operating and capital expenditure costs, replacing those considerations with a rental fee. Crucially, it frees managers to focus on opportunities elsewhere in the business.Ê Regulators and governments applaud the bob creation and the ecological beneÕts associated with these transactions in that fewer towers are built in the country as a whole. As in other sectors, growth credentials make value accretion that much more straightforward and this has driven the accelerated

adoption of the tower outsourcing model in Africa, Latin America, South east Asia and India. These territories are characterized, in signiÕcant regions at least, by lower mobile penetration rates, a higher proportion of youth in the population, and greater scope for technology migration È 3G requires about three times more towers than 2G for a similar area. These factors mean there is a signiÕcant network build requirement for operators to meet national and regional coverage levels in line with their license terms, while it makes more economic and commercial sense for a single, shared passive network to be built rather than three to Õve duplicated versions. That said, there are plenty of tower outsourcing transactions underway in the mature markets of Europe, albeit the drivers are somewhat different and are more weighted to cash conservation and balance sheet distress on the side of the operators rather than growth. This is reÖected in the somewhat lower multiples at which these mature market assets transact.

Issue 8

Welcomed by ÕfYf[aYdeYjc]lk Finally, Õnancial markets tend to smile on the standalone physical network: tower assets tend to be valued at more than 12x EBITDA compared with 4Ç6x for MNOs. Where the MNO retains a stake in the spun-out tower business, the analysts give credit for the higher multiple on a sum-of-theparts valuation. The spin-out provides visibility on the Õnancial beneÕts of the transaction, both immediate and longer term.

Rhys Philip Chief Commercial OfÕcer IHS Group

21


22

Inside Telecommunications


Issue 8

23


Ernst & Young

Now available

Assurance t Tax t Transactions t Advisory

Metrics transformation in telecommunications Meeting the challenges of communicating performance in a shifting industry landscape Across the global telecommunications industry, the fast-changing technological, competitive and customer environment is calling for a renewed look at the metrics operators use to measure and report their financial performance. The changes impacting the industry are pervasive and profound, and they occur in several dimensions. It is vital that metrics keep pace with changing market conditions, business models and service offerings. It is also important to maintain global consistency in these new and evolving metrics as operators widen their service propositions and as investors and regulators demand new insights into addressable markets and end users.

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member Õrms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

Jonathan Dharmapalan

Global Telecommunications Leader bonathan.dharmapalan8ey.com

Holger Forst

Global Telecommunications Markets Leader holger.forst8de.ey.com

How Ernst & Young’s Global Telecommunications Center can help your business Telecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating Õerce challenges over the ownership of customers and service innovation, and pricing pressures and network capacity are intensifying scrutiny on return on investment. Additionally, regulatory pressures and shareholder expectations require agility and cost efÕciency. If you are facing these challenges, we can provide a sector-based perspective to addressing your assurance, advisory, transaction and tax needs. Our Global Telecommunications Center is a virtual hub that brings together people, cultures and leading ideas from across the world, to help you address your global, regional and local challenges. These may include next-generation services and product proÕtability, customer lifecycles and revenue assurance, working capital management, risk, regulatory strategies and compliance, potential cost reductions, mergers and acquisitions, Õnancial and operational improvements, accounting and tax strategies. Whatever your need, we can help you improve the performance of your business.

Prashant Singhal

Global Telecommunications Markets Leader prashant.singhal8in.ey.com

¡ 2013 EYGM Limited. All Rights Reserved.

Now available at www.ey.com/telecommunications.

Contacts

EYG no. EF0118

Olivier Lemaire

Telecommunications Leader È EMEIA olivier.lemaire8lu.ey.com

Luis Monti

Telecommunications Leader È Americas luis.monti8br.ey.com

David McGregor

Telecommunications Leader È Asia-PaciÕc david.mcgregor8au.ey.com

Masahiko Tsukahara

Telecommunications Leader È Japan tsukaharaWmshk8shinnihon.or.bp

CSG/GSC 2013/967879 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional budgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any speciÕc matter, reference should be made to the appropriate advisor.

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