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

February 9, 2010

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.

Julie Richardson, a managing director at Providence Equity Partners, said: “2010 won’t be a banner year for M&A. There is still a lot of uncertainty out there.” But she did list the wireless sector as likely to be the most active. “It is going to be a really tough business in voice mobile telephony… those who don’t have differentiated positions will have to ask themselves, ‘How do I make myself stronger?’.”

Even in such a competitive market, Davis Terry, a former UBS banker and founding partner of Tap Advisors, saw little possibility of M&A activity. “The four big guys (AT&T, Verizon, Sprint and T-Mobile)… (it’s) unclear whether any of them could do anything with each other… the smaller guys, with the exception of Leap and Metro, (there are) not many of them left,” he said. “In the U.S., it’s going to be lean for a while, a few deals here and there but nothing like the old days.”

International markets offer some hope, at least for private equity. Recently, a group led by Quadrangle Capital, the buyout firm co-founded by Steven Rattner, invested $300 million in India’s Tower Vision, a manager of wireless towers. In general, mobile infrastructure investments in developing countries is an attractive area for private equity, the panelists said.

“When you look at China and India, that will be the predominant (area) for us,” Providence’s Richardson said. Terry also agreed that Asian countries top the list of preferred international destinations, but added that the growth of Africa’s wireless markets also present attractive investment opportunities.

Of course, it all depends on whether the credit markets hold up. “Private equity will turn somewhat on the strength of credit markets,” said Andrew Frey, managing principal at Quadrangle. “If that persists you’ll likely see a pick up in private equity activity.”

(Additional reporting by Sinead Carew)

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