Join our community of smart investors

A tangled web of telecom deals

Telecom companies' consolidation efforts have fallen through due to regulators and deal pricing.
August 8, 2014

Consolidation is common among telecom companies as it helps them to fend off price competition, rapidly expand their networks and cross-sell to customers. But several recent deals have been scuppered by both competition regulators and reluctant sellers. For instance, O2-owner Telefónica (TEF) offered €6.7bn (£5.3bn) for Brazilian telecom GVT this week, but owner Vivendi (VIV) says it's not for sale - despite selling its SFR telecoms business earlier this year. Similarly, Iliad (ILD), the owner of French low-cost carrier Free, launched a $15bn (£8.9bn) bid for a 57 per cent stake in US carrier T-Mobile (US:TMUS), but the latter is expected to reject the offer as it undervalues the company.

IC TIP: Hold

Success for Spain's Telefónica would bolster its presence in the fast-growing Latin American market, offsetting the depressed pricing and demand it faces in Europe. And a deal would bring Vivendi closer to exiting its legacy telecoms business, narrowing its focus on French pay TV unit Canal Plus and Universal Media Group.

The rationale for Iliad's approach is less clear-cut - broker Espirito Santo labelled it "one of the most bizarre bits of potential M&A we have ever witnessed in the sector". Iliad expects it to create $10bn in synergies, which seems unlikely given that T-Mobile's current majority owner is the much larger Deutsche Telekom (DTE). But Iliad's chances of success have improved now that American carrier Sprint has withdrawn its own offer for T-Mobile after failing to win over competition regulators.

Domestic investment needs may also factor in - Iliad is yet to build a nationwide mobile network and may have to invest heavily in spectrum auctions in 2016. And Deutsche Telekom has spent an average of €3.6bn annually in the past three years on upgrading its domestic networks and faces competitive threats from Vodafone and Liberty Global. Therefore, Iliad may want to save money, while a sale would top-up Deutsche Telekom's coffers - although Sprint's exit may rule out a lucrative bidding war.