Telecoms M&A = Wireless M&A, not much else

Many analysts and bankers who focus on the U.S. telecommunications sector believe that consolidation among wireless carriers is inevitable. There are too many wireless phone service providers already, and the top two — AT&T and Verizon — own the lion’s share of the market, which makes it increasingly tougher for smaller players to survive. Sprint acquired Virgin Mobile USA last year, Leap Wireless has hired advisers to explore a potential sale of itself (most likely to MetroPCS) and Deutsche Telekom is figuring out whether to sell or spin off its T-Mobile unit, which is the fourth largest U.S. wireless operator.

Bankers, telecom company executives and private equity types echoed these views at a Feb 9 event on deal-making in telecoms and media in 2010, organized by the Argyle Executive Forum. Yes, the U.S. wireless sector will likely see some deals born of necessity, but that doesn’t spell the return of M&A to the telecommunications sector as a whole, panelists said at the half-day event in New York. Rural telecoms companies could also see more consolidation, some of the panelists said, as these providers merge to cut costs and keep growing even as they lose traditional phone users.

A combination of Leap Wireless and MetroPCS makes “obvious sense,” said Prem Parameswaran, who heads Deutsche Bank’s telecoms group for the Americas.  Because Leap and MetroPCS operate in certain markets that cable operators provide their services in, a cable company like Comcast could potentially be interested too, he suggested. However, Parameswaran didn’t get around to explaining how this might sit with Comcast’s current investment in emerging provider Clearwire.

Parameswaran said that the financing markets have opened up again after the credit crisis, and “a byproduct of financing is M&A,” which means more deal-making in the offing, although he questioned how sustainable current financing levels are.

The afternoon deal: PE in Berlin

Optimism, and the accompanying cash flow, seems to be improving report Megan Davis and Simon Meads from the private equity Super Return International conference in Berlin.

“A lot of balance sheets in corporate America got clean and lean and I think you’ll see a good deal of M&A activity over the next couple of years,” said Apollo Management’s founder Leon Black.

Here are some other takes from Berlin:

Apollo predicts ‘bonanza’ in commercial property (FT)

Albatross of a feather…

Japan Airlines said it would keep its partnership with American Airlines in the Oneworld alliance, ending an attempt by Delta Air Lines to entice the bankrupt carrier to its rival SkyTeam group. JAL, Asia’s largest carrier by revenues, said it would file with American Airlines for regulatory approval for closer cooperation on transpacific routes under a recently signed “open skies” treaty between the United States and Japan.

Delta had been courting the Japanese carrier for months with an offer of $1 billion in financial aid. A nice offer, but hardly enough to put a dent in JAL’s $25 billion debt load. Of more value was access to Delta’s larger route network, which could have saved it some costs.

JAL’s new management team said switching alliances risked derailing its efforts to revive itself in three years with the help of a government-backed fund. Another big concern may have been one of antitrust. American had said that defecting to SkyTeam could drain JAL of about $500 million in revenues during a transition period of 18-24 months, but was also arguing that a Delta and JAL tie-up would stifle competition by creating a dominant player on transpacific routes.

With all of its problems, JAL can perhaps be forgiven for not wanting to keep that “dominant player” tag.

DealZone Daily

Japan Airlines will keep its partnership with American Airlines, due to concerns that forging ties with rival suitor Delta Air Lines would make it difficult to achieve a quick turnaround, a source tells Reuters. Delta and American have been courting JAL, now bankrupt, for months, looking to gain access to its vast network in Asia.

British pay-TV group BSkyB sold a 10.4 percent stake in commercial broadcaster ITV, finally bringing an end to a long-running legal battle. BskyB had been ordered to cut its stake to below 7.5 percent in 2008. Since then, it has been through a series of appeals, all of which it lost.

For these stories, and all other Reuters news on deals, click here.

And for a selection of news in rival media:

The afternoon deal: Taxing PE

As a political move, raising the taxes on private equity firms seem a no-brainer but as Megan Davies and Kim Dixon report, gaining tax dollars from the easy target may not be a simple process.

The tax is likely to be a hot issue at one of the private equity industry’s biggest conferences, Super Return International, which starts on Tuesday in Berlin and is attracting heavy hitters from major American buyout firms such as Carlyle and Apollo.

More PE news:

Could Google/China bust up be bad for Disney’s bus stop?

Walt Disney is leading a group effort to buy into China’s largest bus-based digital media and advertising company, Bus Online. The investment would be peanuts for Disney, but the headache could wind up being jumbo sized because one of their investors in the bus deal, sources tell us, is Google.

Google threatened to quit China only a few weeks ago and the internet search giant is finalizing a deal that will let the U.S. National Security Agency (NSA) help it investigate the corporate espionage attack it thinks originated in the People’s Republic. China has warned the U.S. not to make politics out of the Google issue, but it may be too far into the saber-jangling season for that, with Barack Obama having announced fresh U.S. weapons sales to Taiwan in his State of the Union address.

Though Google’s stake in the Bus Online deal is said to be small, even smaller than the tiny investment this will be for media giant Disney, it could just be big enough to cause headaches for Mickey and Co.

Bus Online is leading China’s media and advertising charge into this busy area of mass transit. It had revenue of only about 314.5 million yuan ($46.07 million) in 2009, but is the exclusive partner of state broadcaster CCTV and the official Xinhua news agency media content in advertising on buses. Sources tell us that senior Disney executives are set to fly to Beijing to meet media regulators to discuss Mickey’s long-term development plan in China, including the Bus Online deal.

The afternoon deal: Regulation

Impending financial regulations are rumbling though the banking quarters like thunder through a skyscraper’s walls. It’s unsettling to some.

Today Christopher Dodd, the Democratic chairman of the Senate Banking Committee, said he has reached an impasse with his Republican counterpart and will begin drafting new legislation to be considered later this month.

Congress is trying to construct an overhaul of financial regulations in the wake of the market meltdown that led to multi-billion dollar taxpayer bailouts of individual financial firms and the collapse of others, including Lehman Brothers.

Proposals include creating a consumer agency to police financial products, forming a systemic risk regulator and drafting stricter capital and liquidity requirements for financial firms.

Hot air

In a sign of the times, Air Products and Chemicals has become the latest suitor that does not want to hear ‘no’ for an answer.

The company launched an unsolicited $5.1-billion cash bid to buy rival Airgas in a move to create the largest industrial gas company in North America. In the past four months, Air Products had made two written offers but they were rejected by the Airgas board.

Unsolicited approaches and hostile M&A tend to increase coming out of a recession. As the economy begins to stabilize, stronger players feeling more secure in their own future seize on the chance to buy rivals at still-depressed prices. In the past few months, such deals include Kraft’s bid for Cadbury and the battle involving Agrium, CF and Terra.

Air Products said it offered a 38 percent premium over Airgas’s closing price Thursday and an 18 percent over Airgas’s 52-week high. But the $60 per share offer is around the low $60s Airgas touched in June of 2008.

Noted: Raiffeisen capital hike could boost EPS

HSBC analyst Johannes Thormann suggests an elegant way for Raiffeisen International, the Vienna-based No.2 bank in emerging Europe, to sell new shares this year. While the bank is relatively well capitalised for the time being, with core Tier 1 at 8.7 percent at the end of Q3, this was only thanks to a 1.25 billion euro injection from its unlisted 70-percent parent RZB, which passed on some of the Austrian government capital it received itself last year.

It was a shareholder-friendly idea of RZB to inject 600 million euros of this capital by way of non-voting “participation rights” which didn’t dilute shareholders at a time when the share price was battered because of lingering concerns eastern Europe was facing a financial meltdown. (The remaining 650 million euros are a straight Tier 1 hybrid.) But the flip side was that those participation rights carry a steep 10 percent coupon that goes out after the net profit line, i.e. is after taxes.

In a research note initiating his coverage of Raiffeisen, Thormann says that using a 10-percent share issue (which, as it happens, works out as roughly 600 million euros at current prices) to repay the participation rights would therefore actually increase earnings per share:

“We have not factored in any capital increase but could easily imagine a 10% capital increase in 2010 in which Raiffeisen International would use the proceeds not to boost its Tier 1 ratio but to pay back the EUR600m Genussrechte (participation rights). This move, which would also effectively strengthen the capital position of RZB Group, would not imply a 10% EPS dilution. Rather it would be 10% EPS accretive in 2010e and just 1% EPS dilutive in 2011e as the 10% after-tax coupon on the EUR600m Genussrechte would fall away.”

DealZone Daily

U.S. industrial gas supplier Air Products and Chemicals Inc launches a hostile bid to buy rival Airgas Inc for about $60 per share in cash, in a deal valued at about $7 billion including assumed debt.

Deutsche Telekom is considering an initial public offering or spinoff of its U.S. wireless service T-Mobile USA, the Wall Street Journal reports, citing people familiar with the matter. T-Mobile USA could have an equity value of around $20 billion, the Journal says.

There’s plenty of other M&A and corporate finance news reported by Reuters and other media on Friday. Highlights include:

Mongolia’s government cancels the auction of an estimated $2 billion stake in one of the world’s largest untapped coal deposits, ending the hopes of global mining giants eager for a slice of the project, sources tell Reuters.