Digital M&As in emerging markets

Digital M&As in emerging markets

The Delta Perspective

Author: Hani Abbasi

Telecoms immersion in the digital space

With slower subscriber acquisition and stagnating revenues, the connectivity business in emerging markets is starting to reach maturity. Additionally, significant increase in traffic from subscriber usage and competitive pressure further impacts telecom operators’ profitability.

Telecom operators need to continue investing into their networks to keep up with their subscribers’ growing usage needs (primarily data). Although operators have taken adequate measures to optimise such investments (e.g. tower sharing, demand-based selective rollout, upgrade to efficient networks, etc.), their financial health in terms of lower ROIC and potential funding needs is still impacted. This consequently translates into lower valuation multiples, impacting shareholder value.

Data needs of customers are growing exponentially owing to increased availability of digital content with better quality (e.g. HD). Furthermore, traditional telecom usage needs (voice and messaging) are also shifting towards their digital substitutes (e.g. VoIP, instant messaging, social media, etc.). Telecom operators have aspired to be a part of this digital wave for some time now but have not always been successful in securing a distinct role for themselves. They have typically adopted the following strategies:

a) Do it yourself (DIY)
Many telecom operators, primarily in developed markets, initially tried to build a digital portfolio organically. However, they soon realised that the focus required and time to market given increasing competition from OTTs made it challenging to yield the desired results.
b) Partnership with OTT players
Establishing partnerships with large digital players has successfully worked for many telecom operators (e.g. Facebook / WhatsApp bundles across several Vodafone and Orange markets, Skype on Three UK, etc.) but at the cost of long commitments and exclusivity agreements, which given changing industry dynamics, might not be very desirable.
c) Equity investment
This is the most effective strategy and has been adopted by telecom operators leading in the digital space (e.g. SoftBank conducted over 10 transactions only in the last year). Apart from the quick time-to-market and financial upside, an equity investment also drives synergies into the core business of the telecom operators.

Therefore, emerging market telecom operators should seek only those partnerships which are linked to areas where they have USPs (e.g. infrastructure) to offer to digital players. This will make the operator an enabler for the digital player. Equity investment, however, remains the best option for operators to participate in the digital space.

Note: Singtel initiated digital investments in 2011 whereas PLDT’s first digital investment was in 2014

How can telecom operators succeed in digital investments?
Based on our experience through several successful digital M&A transactions with emerging market telecom operators, we recommend the following guidelines:

  1. Track record in emerging markets
An ideal digital asset should have a proven experience in emerging markets, especially in markets where the telecom operator is present. It should also be eager to partner with a telecom operator, preferably with exclusive agreements.
  1. Investment into existing digital ventures
However, given that digital assets in emerging markets are scarce, it makes sense for operators to initially invest into existing global digital ventures (e.g. Rocket Internet), which come with extensive experience in regional tech start-ups with a wide portfolio of assets. Earlier this year, PLDT acquired a 10% stake in Rocket Internet (global) and a 50% stake in the Philippines Internet Holdings (with Rocket).
  1. Minority stake first
It is recommended for operators to initially invest into a minority stake (limiting exposure), especially when the digital asset does not have a proven track record or the synergies are not sizeable. SoftBank has adopted this strategy for several acquisitions (e.g. Scigineer, GrabTaxi, etc.).
  1. Synergies
In addition to a new revenue stream, a digital investment should also result in sizeable synergies for a telecom operator in the form of revenue upside and cost reduction. These synergies are often not accounted for in the valuation and can be considered an ‘additional upside’. Further to its joint venture with Rocket Internet (Africa Internet Holding), MTN’s products, services and devices are sold by Jumia (owned by African Internet Holding) in Nigeria and Cameroon, and vice versa (Jumia’s devices are sold by MTN).
  1. Own digital vehicle
As operators scale their digital efforts, it is recommended for them to form an investment vehicle consolidating all digital assets. A digital vehicle also helps from an organisational structure and transaction ease viewpoints (e.g. Singtel’s Innov8 Ventures, active since 2011 – see Exhibit 1).
  1. Themed investments
When defining their digital strategy, operators need to prioritise target themes (e.g. advertising platform, payment solutions, classified, etc.) for their investments. A stronger portfolio per theme is always better than scattered investments across several themes. Telenor has heavily invested into online classified businesses and has recently partnered with Naspers to expand into four emerging markets.

Given solid fundamentals and the significant opportunity at hand, emerging market telecom operators need to act fast (but with caution) to gain a stable footing in the digital space.

Authors' bio

Hani Abbasi is a Vice President at the corporate finance division at Delta Partners, the leading advisory and investment firm specialising in the telecoms, media and digital (TMD) space. Delta Partners Corporate Finance focuses on assisting clients in the TMD space investing in both emerging and developed markets. Headquartered in Dubai, the firm also operates from its strategic hub locations in Barcelona, Bogota, Johannesburg, Redwood City and Singapore.