Hopes of upturn in 2Q09 telecom financial deal flow despite unfriendly public markets

MELBOURNE, AUSTRALIA: According to a new study from Ovum, the global analyst and consulting company, telecom sector financial deal activity in 2Q09 reflects a modest, but tangible, increase in confidence among the major players: carriers, vendors, their financial and legal advisors, and the investment institutions looking for reasons to pull their money off the sidelines.

Based on Ovum’s report, titled Financial Deals Industry Insight -– Telecommunications (2Q09 edition), public stock offerings remain nearly nonexistent even as market volatility lowers, and venture capital (VC) investments in telecom continue in similar volumes but at a much lower average deal size: from $13.0M per deal in 2Q08, the 2Q08 average was $9.8M.

However, the private placement market -– issuance of debt securities for fundraising –- has actually picked up nicely as public markets have fallen: 19 deals in 2Q09, in line with the quarterly average since 4Q07 –- but the total deal value increased again, nearly double 1Q09 to $18.0B, up from $3.6B in 2Q08.

One significant deal as of yet unclosed –- South Africa-based MTN’s pending merger with Indian carrier Bharti Airtel (partly funded by a separate private placement deal) –- does sway the average upwards, but there were three other closed deals above $1B in 2Q09: Qtel, Crown Castle, and Cricket/Leap.

Matt Walker, Ovum principal analyst and author of the report, noted that there is also promising news from the world of mergers and acquisitions: “We are starting to see more big, complex deals; these often entail long negotiation cycles and carry regulatory uncertainties. In late 2008 the financial market’s volatility killed interest in such transactions.”

For 1H09 overall, M&A deal count in telecom was 315, down significantly from the 391 deals announced or closed in 1H08. But total deal value for 2Q09 was roughly $35B, or twice the average seen in the previous three quarters.

Watching the announced but not yet closed deals will also help gauge market stability, especially MTN-Bharti, but also Verizon’s sales of select assets to (in separate deals) Frontier and AT&T; Greece’s sale of a 5 percent stake in OTE to DT; and Russia-based Rostelecom’s sale of a 40 percent stake in itself to two separate investment entities.

In addition, Walker noted that governments and deep-pocketed vendors are helping to close the gap as public markets remain tough. Governments are doing this by directly funding broadband infrastructure buildouts, licensing new wireless spectrum at favourable terms, subsidizing private sector R&D (e.g. at the European Investment Bank), and lending money in special cases, as when Export Development Canada offered NSN $300M for its initial bid on Nortel’s CDMA and LTE assets.

As for vendors, Cisco is one example: it is using its Cisco Capital unit to leverage its notoriously rich cash horde -- over $33B of cash and short-term investments on the balance sheet -- to offer financing to customers and channel partners. In 1H-FY09, it was responsible for $2.1B in lease and long-term loan arrangements.

In addition, Chinese vendors ZTE and Huawei both have billions of dollars in either explicit or implicit credit lines with various Chinese banks: the China Development Bank, the Export-Import Bank, and the Bank of China.

Walker said: “This subsidized financing helps these Chinese vendors’ carrier customers expand more easily and quickly, which also facilitates deal activity (e.g. cross-border M&As to grow wireless footprint).”

On net, Walker concluded that, while the outlook remains cloudy, steps taken in 2Q09 by vendors, governments, and private financiers to compensate for weakness in the macroeconomy and public equity markets bode well for the remainder of the year in telecom.