/Mikus Janvars, Partner Porta Finance/
Telecommunication industry has transformed, over the last few years, from a dormant and a bit boring sector to one of the hottest M&A battle fields in Europe. Besides the most popular recent transaction – where the fixed telecommunication operator British Telecom plans to acquire the largest mobile operator in Britain EE for 12,5 billion pounds – there have been numerous other significant M&A deals in the sector. What has risen the M&A telecommunications bear from its winter sleep?
The telecommunication industry has experienced significant changes over the last few years. Additionally, to the exponentially growing amount of data that overloads the telecommunication networks each year and forces the companies to increase their investments in the infrastructure, the market players have to face series of other challenges that have not been seen before.
The impact of various regulations on the operational results of telecommunication operators is increasing. In efforts to increase the openness of the united market between the member states, European Union makes the restrictions on roaming charges more aggressive each year. Consumers clearly gain from this situation, however, the profit and loss statements of companies do not. The pressure continues to increase on the financial results of the companies and their profit margins.
The relationship between the telecommunication operators and the providers of content is changing significantly. The popularity of direct content providers, that threatens the positions of the companies in the industry, increases. Such direct content providers as Youtube (Google) and Netflix increase their share in our media consumption basket, frequently trying to decrease the role of telecommunication operators till “dumb pipe” level.
How Europe’s leading telecommunication operators’ deal with these challenges? Many operators rely on the two magic words – convergence and consolidation. Consolidation between the market players, especially between mobile operators, is observable in numerous European States. O2 and Hutchinson deals in Britain and Ireland as well as TeliaSonera and Telenor merger in Denmark are only few of the inner industry consolidation examples, which typically happens in a setting where four operators consolidate into three. Convergence happens in cases where fixed operators merge with mobile operators. There are numerous examples with deals conducted over the last year. Already mentioned British Telecom / EE deal as well as Vodafone / Ono deal in Spain are only few of the loudest examples in Europe.
Operators are trying to make their cost base more efficient with the help of consolidation and convergence, for example, offer 4-play services to consumers (TV, internet, mobile voice, fixed voice), also to decrease churn and increase competitiveness between the companies that offer media and fixed content services.
What do these trends mean for Latvia? The consolidation of mobile operators in Latvia is unlikely – there are no precedents in the European Union where there would be only 2 operators left in the market. However, convergence seems as a very logical step. Lattelecom and LMT are the two flagships of our telecommunication industry that seem to be very suitable candidates for the convergence scenario. The companies have similar shareholder structure, the market does not offer any 4-play solutions and the boards of both companies have confirmed the existence of synergies in case of a merger. There are reasonable grounds for the question of the convergence scenario to appear on the agendas of the shareholders.
