With people and businesses increasingly demanding faster, more reliable and more widely available connections, telecoms has never been more central to daily life. The advent of technologies like VoIP, fibre broadband and 5G, has also meant telecoms companies are rapidly gaining the ability to meet this soaring demand.
Back in the day, a ‘telecoms’ company described a business that provided wholesale or retail telephone services, and often those same companies provided the infrastructure around these services. Now telecoms is a much broader label that encompasses any business that makes digital communication possible on a local or global scale. This could be over the telephone, the internet, across wires and cables, or through the air, wirelessly.
These businesses provide the hardware and software infrastructure that allows data in words, audio, voice or video to be sent almost instantaneously anywhere in the world. They include ISPs, satellite companies, mobile operators, cable companies as well as fixed line and mobile telephone companies.
This increased reliance on telecoms and the accompanying technological advances are driving a political, economic and regulatory culture that is incentivising further growth in the sector. Naturally, this is set to prompt greater interest from private investors and M&A activity.
This situation has only intensified as a result of the COVID-19 pandemic, during which connectivity has become vital for everything, from work, to education, socialising and entertainment. High bandwidth capacity and reliable telecoms connections for uninterrupted voice and video calls are more vital than ever and, with huge amounts of money in the sector, telecoms M&A is forecast to be one of the most active dealmaking sectors in 2021 and beyond.
What are the key factors driving this growth in the UK’s telecoms market? And what opportunities are there for UK buyers to take advantage of the sector’s newfound prominence?
Government invests as UK plays catch-up
In the UK, broadband has become one of the government’s chief concerns as it looks to address years of neglect towards the country’s broadband infrastructure. This neglect has seen the UK consistently ranked as one of Europe’s worst for fibre broadband coverage.
In the FTTH Council Europe’s annual ranking of European countries with the strongest fibre penetration, the UK only managed to make it into the rankings for the first time in 2019, when it ranked last. The UK’s poor standing on fibre compared to many European nations was illustrated in the next year’s rankings, when, despite huge investment, it still ranked third from bottom.
The government’s response to this has been its £5 billion Project Gigabit, through which it aims to connect 85 per cent of UK premises to gigabit-capable broadband by the mid- to late-2020s. This level of investment will be a huge boost to companies throughout the broadband supply chain. Not just broadband providers, but also manufacturers and the infrastructure firms who help build the networks.
As a result, buyers will also be increasingly keen to enter the sector and tap into this rapid growth and investment. With government investment in broadband, not to mention its increasing spending on 5G, telecoms and telecoms infrastructure offer solid, predictable cash flows to potential buyers.
Towards the end of April 2021, WHP Telecoms announced the acquisition of telecoms rigging installation and design solution firm ICS Group. Based in Essex and Cambridgeshire, ICS is a provider of design and build services to a range of telecoms providers across the UK, including Telefonica.
Acquiring such a prominent firm in the booming telecoms infrastructure market (in what was its third acquisition in a month) made a huge amount of sense for WHP, a company which is targeting organic and acquisitive growth with the backing of private equity firm Equistone Partners Europe.
Discussing the acquisition, WHP CEO Rob Potter said: “ICS is a unique company renowned for its design and build capability, something that WHP has been committed to investing in in recent years.”
“They have an excellent roster of high-profile clients that have clear synergies with our wider portfolio, so we are delighted to be welcoming Alex, Kevin, Matt and the whole team into the group.”
Potter added that the acquisition “further strengthens our client service offering, which will benefit the UK’s communication networks as investment in 5G and fibre gathers pace.”
This has also come at a time when the environment for telecoms M&A has perhaps never been more encouraging. In the broadband market, for instance, smaller UK providers and specialist infrastructure firms are increasingly challenging the dominance of bigger companies and could represent ideal acquisition opportunities for the right buyer.
On a grander scale, moreover, the prospects for big acquisitions and mergers among telecoms firms across the UK and Europe have improved. This is largely being attributed to the European Court of Justice moving to annul a European Commission decision to ban the proposed merger of O2 and Three, indicating a far more permissive regulatory environment for big telecoms deals.
The new normal
The UK’s spending on broadband and 5G over recent years illustrates that telecoms had been a huge concern for the government prior to the COVID-19 pandemic. But, while this is the case, the pandemic certainly cast the UK’s telecoms problems into a stark light, making improvements to the sector even more pressing.
Almost overnight, the pandemic meant that millions across the UK were working and learning from home and, for long stretches of time, virtually living in a digital world. This brought with it huge issues for people struggling with poor broadband connections.
In a survey by ISP Truespeed released earlier this year, 46 per cent of respondents said they had experienced broadband connectivity problems at least once a week while working or educating their children from home. With this in mind, and with working from home forecast to remain a major trend post-pandemic, improvements to home broadband and network coverage have never been more vital.
Combined with government investment in broadband and 5G, and the greater importance of connectivity to daily life, business at telecoms firms should continue to grow while the pandemic lasts.
Moreover, the aforementioned problems that many have experienced with home broadband during lockdown means that there is more opportunity for smaller startup providers to disrupt the dominance of traditional giants by offering a more dedicated service. This will serve to make them more attractive acquisition prospects to bigger industry rivals or private investors.
Again, this all means that dealmaking should flourish as a result of the ‘work from home’ economy. Furthermore, companies may look to M&A in order to boost their offering to appeal to customers spending more of their lives at home.
Depending on their particular sub-sector within telecoms , growing businesses may turn to acquisitions in order to diversify their product offering. With streaming more popular than ever during the pandemic, ISPs may look to add streaming services to their bundles, while business telecoms firms may appeal to companies by offering cybersecurity services that protect employees working from home.
In many cases, such services could be best added to a product offering by acquiring an existing firm, their workforce, customer base and expertise, rather than developing it from scratch.
Business telecoms must react
One element of telecoms that may seem likely to suffer as a result of the COVID-19 pandemic is traditional business-to-business telecoms. With so many employees likely to be working from home beyond the pandemic, demand for telecoms services such as dedicated leased lines or office-based phone systems look certain to take a hit.
However, there are elements of the pandemic driving dealmaking within the business telecoms sector. Crucially, the need to diversify offerings in light of many business’ reduced reliance on the office environment. In order to retain business, sell new services to existing customers and attract new customers, business telecoms firms will need to expand what they can offer.
As outlined above, the best (not to mention easiest) way for many to do this will be to make strategic, bolt-on acquisitions of firms that already provide these services and have the relevant expertise to enable a smooth, quick integration.
Business telecoms provider Arrow Business Communications recently completed the acquisition of network and security solutions firm UK-Tec, as it sought to acquire services that would fit into and aid its private equity-backed growth and development strategy.
Offering a range of security, network and cloud-managed solutions, including its core SD-WAN services, the acquisition of UK-tec made clear strategic sense to Arrow as it looked to bolster its managed services and SD-WAN.
Commenting on the acquisition, Arrow CEO Richard Burke said: "As a group we have been looking to accelerate the development of our SD-WAN, complex networking and wider channel offering.”
"Bringing the UK-tec business into the group significantly enhances our capability in all of these areas, with the team providing strong technical leadership and experience that will benefit both the Arrow Group and its channel partners.”
"I am excited about what we can achieve together with our combined product portfolio in the coming years and delighted to complete the acquisition."
Private equity takes note
A common thread linking many current M&A trends is the role of private equity. Following several years of slow investment in the sector, COVID-19 has prompted renewed private equity interest in telecoms.
The sector’s stability, combined with factors such as the impetus of government spending, massive infrastructure projects and a regulatory environment that seems conducive to big mergers and acquisitions, has begun – and should continue – to attract private equity interest in the sector.
Private equity investment could spur dealmaking in several ways. Firstly, of course, in the case of big acquisitions and mergers of telecoms companies by or involving private equity firms. For example, the £5.3 billion acquisition of Spanish telecoms giant Masmovil in November 2020 by Lorca Telecom Bidco SAU, a consortium comprised of private equity firms Cinven, KKR and Providence.
Secondly, similar to how telecoms firms may target strategic acquisitions to grow their product offering, private equity firms with existing telecoms-related portfolios may seek to make bolt-on acquisitions. Such small to medium sized deals could help private equity firms tap into trends such as the remote working boom or the thriving broadband infrastructure industry.
Finally, as illustrated above, private equity firms could continue to invest in telecoms firms and provide the financial backing for them to embark on buy-and-build acquisition drives.
How BSR can help you buy into the telecoms sector
According to Business Sale Report’s research team, there are currently over 600 telecoms firms in the UK that generate annual turnover of between £1 million and £100 million. Of those businesses, 454 are profitable, while 55 are in some form of financial distress.
What does that mean? Well, from the perspective of someone looking to buy into the telecoms sector, it means a wealth of opportunities to acquire either a thriving, profitable business or to take over a struggling business at what might be a very good price. However, these opportunities mean little if you don’t know where to look. That’s where Business Sale Report can help.
Over the past few years, Business Sale Report has helped buyers and investors from various sectors, including telecoms, identify the right acquisition opportunities through our Dedicated Acquisition Service.
When searching for the right target company in the telecoms sector, technology companies are often registered under different SIC codes, making this a hard starting point. Further research is almost always required to figure out whether the target company fits your criteria.
Business Sale Report’s team have a wealth of experience in performing research and outreach services when it comes to finding and approaching target companies. What makes our approach different is that:
a) We work with very accurate general and industry-specific databases, giving us information on over 8 million businesses in the UK, including telecoms firms.
b) We know what to look for based on your criteria (size of the business, turnover, location etc.).
c) Corporate information is then verified and enhanced by our in-house research team.
d) We are efficient and deliver results in the shortest amount of time. We recommend giving it around 6-8 weeks, but in that time, we will be sourcing and finding opportunities that are off-market and perfect for you.
For more information on our Dedicated Acquisition Service and to submit your enquiry, please check out this page.
As the government’s push to make the UK a leader in fibre and 5G technology continues, telecoms companies, from ISPs to infrastructure firms, will take on even greater prominence within the UK. This is occurring at the same time as the sector is becoming increasingly populated by smaller providers looking to disrupt the status quo and capitalise on dissatisfaction that has arisen among consumers over recent years and intensified during COVID-19. As the sector’s status continues to grow, these promising companies will become natural, attractive targets for bigger rivals or private equity firms.
COVID-19’s “new normal” has also created a situation which means that telecoms firms need to adapt, diversify and improve their services in order to retain and gain customers. This should continue to drive strategic acquisitions, as buyers look to take advantage of the expertise and customer base of existing businesses.
Finally, COVID-19 seems to have prompted a renewed interest in the sector from private equity firms, which will be looking to gear up their acquisitive activity and deploy the capital they amassed during a quiet 2020.
With such a wide array of attractive deals to be done and a range of compelling factors supporting continued dealmaking activity, M&A in the telecoms sector looks set to be strong over the coming months.
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