Ringing the changes

The private equity houses involved in the US$6.4bn sale of satellite company PanAmSat announced last month made more than four times their investment in the space of a year. That impressive return is an illustration of why buyout houses have been drawn to the telecoms sector, and particularly sub-sectors such as satellites.

PanAmSat was sold by a group of US buyout houses to Intelsat, owned by a US/UK consortium of PE players. Now Intelsat, which acquired PanAmSat in preference to smaller satellite company New Skies, is thought to have New Skies in its sights again.

The recent activity is due to the need for consolidation in the satellite business. Other major players are Paris-based Eutelsat, which is due to be floated shortly, and Inmarsat. Both are owned by financial investors and could become involved in acquisitions, as analysts believe New Skies is unlikely to remain independent for long.

A number of the satellite companies acquired by buyout houses have successfully been floated in recent months.

“That clearly suggests many investors believe the PE houses are likely to create value,” says Michael O’Brien, telecoms analyst at ratings agency Standard & Poor’s.

There is overcapacity in the satellite sector, which is leading to consolidation, according to Mike Dunning, head of telecoms at ratings agency Fitch, but despite the overcapacity analysts believe the business is stable and that value can be created by cutting costs and introducing new products.

Of course, the telecoms sector is about much more than satellites and buyout houses have been active in various areas, particularly mobile telephony.

Among the most active players at the top end have been US houses such as KKR, Carlyle and Providence, which together sold PanAmSat. Blackstone, which lost out in its bid for Italy’s Wind, and Texas Pacific Group have also been targeting the telecoms sector.

Other houses involved in big ticket acquisitions have been Apax and Permira, which joined forces to buy Intelsat and are thought to be interested in Denmark’s TDC. In mid-market deals, houses such as Advent International and 3i have been active.

As with other sectors, part of the reason for the activity in telecoms buyouts this year is the availability of debt financing.

“There’s a huge amount of debt available, although the Wind transaction in Italy is sopping up quite a lot of the telecom debt capacity,” says John Bernstein, a director at Advent International. He adds that for the right deals there is still a lot of debt and private equity money around.

In the large deals, financial investors are looking for cashflow and some growth, Bernstein says, while trade buyers are predominantly looking for growth. He points to the acquisition from Advent of Danish broadband company Cybercity by Telenor.

“Cybercity is one of the fastest-growing companies in broadband and broadband is one of the growth areas in telecoms,” he says.

Of particular interest to buyout houses is mobile telephony, however. “Private equity likes mobile because it’s a growing sector with attractive cashflows, and therefore it’s highly leverage-able,” says Bernstein.

The largest buyout in telecoms this year was the Egyptian acquisition of Italy’s Wind for €10bn, which beat a private equity consortium. Among the other significant transactions have been the €1.1bn purchase by Apax Partners and Texas Pacific Group of Greece’s TIM Hellas, the €2.4bn acquisition of Spanish telco Auna’s fixed-line assets by a US buyout consortium, and the €600m sale of Danish telecom billings company MACH in a secondary buyout.

But financial buyers have had to adjust to an increasingly competitive market, with trade buyers keen to pick up assets. According to some estimates, the largest five European telcos (Deutsche Telekom, France Telecom, Telecom Italia, Telefonica and Vodafone) are able to spend up to €100bn over the next couple of years without damaging their debt profile.

In August, France Telecom (FT) beat buyout house bids to win the auction for Spanish mobile company Amena. Some of the buyout houses were thought to be unhappy at what they saw as the auction being held up to accommodate FT’s bid.

The bottom line, however, is that FT was willing to pay more, says O’Brien. “It was very important for France Telecom to have a ‘footprint’ in the Spanish mobile market and so they were willing to pay a premium for that strategic asset,” he says, adding that in other cases where telecoms assets become strategic targets for trade buyers, buyout houses might not be able to match the price.

For example, UK mobile operator O2 is one asset rumoured to be an acquisition target in the coming months but if it is put on the block a trade sale should not be ruled out. Last year, the Netherlands’ KPN made an unsuccessful offer and Deutsche Telekom is also thought to be interested in bolstering its mobile presence in the UK.

“The telecom incumbents have repaired their balance sheets in recent years by using cashflow to pay down debt, and that’s left them in a stronger position for acquisitions,” says O’Brien.

But that’s not putting off the larger buyout houses, with the financial consortium of Blackstone, Apax, Permira and Providence that bid unsuccessfully for Amena now thought to be interested in Denmark’s TDC.

Although there has been some media speculation that the private equity consortium will find it hard to come up with a price that will satisfy TDC’s management and shareholders, others see it as a natural target for buyout houses.

“TDC is attractive because there are a lot of different break-up options and that’s ideal for private equity,” says Fitch’s Dunning.

But it is not just the large buyout houses that have been active in telecoms. Advent International has done three deals in recent months.

In June, along with partner Providence, it sold Danish telecom billings company MACH for €600m to buyout house Warburg Pincus. The exit is thought to have returned them about six times their original investment in 2002. Then Advent sold Danish broadband service provider Cybercity to Telenor and in August acquired UK wireless network company Aircom.

“Like MACH and Cybercity, the investment in Aircom represents our strategy of targeting companies in high-growth sub-sectors,” says Bernstein, adding that worldwide growth in mobile infrastructure is expected to reach US$71bn by 2009, up from US$53bn in 2004.

Bernstein notes that in the late 1990s there were relatively few buyout players in telecoms but then a huge number of firms piled in during the dotcom fever.

“Since the bubble burst, the market has been divided between a lot of firms doing very big deals, such as the satellite deals, large privatisations and big cable deals, and a few doing mid-market deals like us,” he says.

But the mid-market is hard work, Bernstein says: “We do quite a lot with the companies we buy, in terms of building them up.” Focusing on the more specialist telecoms sub-sectors has worked well for the fund, he says. “Companies like MACH are not ‘plain vanilla’ because that’s not our approach, although for many PE houses ‘plain vanilla’ is just what they’re looking for.”

Also active in the mid-market is 3i. Its recent deals included the sale to a trade buyer of dtms, a telemarketing company. 3i built the company into Germany’s largest independent provider of telephone service numbers, with gross revenues of €200m.

Achim Lederle, a partner at 3i, says that like other European markets, valuations in telecoms have picked up significantly in the past year. He expects to see more consolidation among city carriers in Germany and independent cable operators.

“I can see the rationale behind bringing these two activities together and if you look at investors like Apax, they are developing a portfolio that includes both kinds of company because of the synergies,” he says.

Lederle believes that there is still great potential in expanding telecom services, particularly mobile, in Central and Eastern Europe.

“There are more opportunities there because some markets there are still regulated but are gradually opening,” he says. “It’s a bit like Western Europe five to seven years ago. That means significant opportunities to buyout houses that are already established in the region.”

Among the PE players that saw opportunities in the CEE last year were CVC and ABN AMRO Capital, which bought Bulgaria’s MobilTel in the region’s largest LBO. Lederle believes that for those already present in the CEE market there are opportunities to pursue business models such as that of dtms in Germany.

“It would be interesting to set up a company like dtms in markets like Poland or the Czech Republic,” he says.

Lederle also believes that, while there is still life in the fixed-line market the overall trend is for business to move to mobile.

“If you look at mobile services today it’s about voice, SMS and fancy ring-tones, but we’re seeing more and more services being developed and taken up, like mobile gaming, music downloads and so on,” he says. “There have already been some interesting trade sales in areas like ring-tones and I think there’s a lot of potential for investing in areas like games and music downloads.”

So, whether it’s large buyouts in sectors such as satellites and mobile operators, or small and mid-market deals in more niche products, telecoms looks set to continue to attract financial investors. But with valuations having risen significantly, it will be important for investors to be careful with their choices.

“There’s still value to be had but it’s important to be selective and some companies will be better positioned than others, especially those with exposure to the wireless market,” says Fitch’s Dunning.