After failed sale, T-Mobile returns as buyer

Contact: Ben Kolada, Thejeswi Venkatesh

After failing to sell its T-Mobile USA subsidiary last year to AT&T for $39bn, Deutsche Telekom has pivoted from trying to exit the T-Mobile business to pushing it even deeper into the US market. The company announced on Wednesday that T-Mobile USA has reached a merger agreement with low-cost competitor MetroPCS in an intricately structured deal.

MetroPCS’s shareholders will receive $1.5bn in cash and 26% of the combined company. While that looks straightforward at first glance, the deal is structured as a reverse acquisition.

MetroPCS will pay its shareholders $1.5bn in cash (it ended the second quarter with $2.3bn in its treasury) and halve the number of shares outstanding by performing a 1-2 reverse stock split. MetroPCS will then acquire all of T-Mobile’s stock in exchange for a 74% stake in the combined company, leaving MetroPCS’s shareholders with a 26% holding. Though MetroPCS is technically the surviving entity, it will assume the T-Mobile name and will continue to trade publicly in the US.

The combined company is projecting 2012 pro forma combined revenue of just shy of $25bn. For comparison, the US’s third-largest cellular provider, Sprint, is expected to put up about $35bn in sales this year.

A bit of irony here is that analysts expected that the previously planned AT&T-T-Mobile merger would reduce competition and increase prices. However, in announcing their merger, T-Mobile and MetroPCS repeatedly claimed that the combined company would be a ‘value-focused’ provider – a pretty way of saying that it would be a low-cost carrier.

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Equinix increasing inorganic growth, nabs ancotel

Contact: Ben Kolada, Thejeswi Venkatesh

In its latest geographic consolidation move, colocation giant Equinix announced on Wednesday the acquisition of Frankfurt-based ancotel. Although previously an atypical acquirer, the ancotel buy is Equinix’s second purchase this month, following the pickup of certain assets from Hong Kong-based Asia Tone for $230m. Equinix recently said its dealmaking isn’t done yet. At the Deutsche Bank Securities Media & Telecommunications Conference in February, the company said it plans to place more emphasis on M&A.

Equinix didn’t disclose the price of the acquisition, but did say the valuation is in line with its projected 2012 adjusted EBITDA trading multiple. With a current enterprise value of $9.7bn, Equinix itself is valued at 11 times this year’s projected adjusted EBITDA. Assuming ancotel’s cost structure is similar to Equinix’s, we’d loosely estimate the deal value at $100-110m. Ancotel generated $21.4m in revenue in 2011, with a three-year CAGR north of 20%. The transaction adds a datacenter with 2,100 meters of capacity, 400 network customers, 200 new networks and 6,000 cross connects. Ancotel also has a presence in both London and Hong Kong.

In a departure from its usual practice of making just one acquisition per year, Equinix recently indicated that it intends to use more M&A to fuel growth. The company already dominates the American colocation market, so future M&A activity will likely continue to be overseas. Equinix has a lofty goal of being in 50 markets in the long term, with immediate priorities being India and China. The company has also expressed interest in growing its presence in South Korea and Australia.

Equinix’s international M&A, past five years

Date announced Target Deal value Target headquarters
May 16, 2012 ancotel Not disclosed Frankfurt
May 1, 2012 Asia Tone (certain assets) $230m Hong Kong
February 15, 2011 ALOG Data Centers* $127m Rio de Janeiro
February 6, 2008 Virtu Secure Webservices $22.9m Enschede, Netherlands
June 28, 2007 IXEurope $555m London
January 10, 2007 VSNL International (Tokyo datacenter) $7.5m Tokyo

Source: The 451 M&A KnowledgeBase *90% stake

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Persistence may not pay off for Vodafone

Contact: Ben Kolada, Thejeswi Venkatesh

After three deadline extensions and interest from competitor Tata Communications, Vodafone Group announced on Monday its latest attempt to acquire Cable & Wireless Worldwide (CWW). Vodafone is offering £1bn, or approximately $1.7bn, to buy CWW. However, its offer has already hit a roadblock. CWW’s largest shareholder, Orbis, which owns 19% of the company, has rejected the bid on the grounds that it undervalues CWW. Vodafone initially expressed interest in acquiring CWW on February 13.

Orbis’ argument does hold some ground. Although Vodafone’s offer represents a 92% per-share premium to when the deal was originally announced, it still values CWW below some precedent transactions. Vodafone is valuing CWW at half times revenue and just 2.7x EBITDA for the 12 months ending September 30, 2011. In comparison, US cable company Knology recently sold to WideOpenWest for 2.8x sales and 8x EBITDA, while SureWest Communications was valued at 2.2x revenue and 6.8x EBITDA in its sale to Consolidated Communications in February. For more business-focused comparisons, PAETEC was valued at 1.3x sales and 8.4x EBITDA in its sale to Windstream Communications in August 2011. Level 3 Communications paid 1.1x revenue and 7.3x EBITDA for Global Crossing in April 2011.

Given the strategic significance of this deal to Vodafone, we expect that the company could appease Orbis with a higher bid. We’ve previously written that Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. The UK wireless operator will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. Throughout the wireless industry, cellular operators are increasingly feeling their networks squeezed as users consume more and more high-bandwidth data. Further, with £7.7bn ($12bn) of cash and marketable securities in its treasury, Vodafone could certainly afford a higher offer.

Few targets left in FEO, but are there any buyers?

Contact: Ben Kolada

In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?

FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.

Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.

Cable & Wireless Worldwide may lose independence

Contact: Ben Kolada, Thejeswi Venkatesh

Just two years after parent company Cable & Wireless Group split itself into two businesses, the consumer division Cable & Wireless and the business services unit Cable & Wireless Worldwide (CWW), CWW may once again find itself as part of a larger organization. Vodafone confirmed Monday that it is in talks regarding the possible acquisition of CWW. The deal, which is rumored to be valued at roughly $1bn, should be welcome news to CWW’s investors, who have seen the company’s stock plummet by two-thirds in the past year.

Independent CWW, which provides fixed lines that link to wireless transmitters and switches, among other voice and data services, has fared poorly since the split, as revenue flatlined and the company issued several profit warnings. However, exploding Internet usage on mobile phones has caused renewed interest in CWW. Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. Vodafone will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. CWW’s investors are hopeful that the deal will come to fruition, with shares of the telco closing the trading day 30% higher. Vodafone has until March 12 to make a decision on the acquisition.

NTT continues global expansion, bags Netmagic

Contact: Ben Kolada

NTT Communications has made another move in the Indian datacenter services market, this time taking a 74% stake in Netmagic Solutions. Netmagic provides managed hosting, colocation and infrastructure management services, among others, from seven datacenters throughout India. This is the latest in a growing line of transactions NTT has inked that have been meant to expand the company’s global datacenter and cloud services footprint.

The deal is yet another international investment in datacenter and cloud services for NTT. In the press release announcing the transaction, the Japan-based telco noted Netmagic’s footprint in the growing Indian datacenter services market as among the top drivers for the acquisition. Our colleagues at Tier1 Research previously wrote that NTT subsidiary Datacraft has already been working with India-based telecom provider Bharat Sanchar Nigam Limited (BNSL). However, NTT said the deal has strategic benefits beyond India, and that it will accelerate its infrastructure and cloud services throughout greater Asia.

This isn’t the first India-specific or international move NTT has made in the datacenter or cloud sectors. In July 2010, the company announced that it was forking over roughly $3.2bn for Johannesburg-based Dimension Data, which also has a footprint in India. NTT cited the cloud computing opportunity as the main motivation behind that transaction. Almost exactly a year later, Dimension Data, then a subsidiary of NTT, announced that it was acquiring cloud, colocation and managed hosting provider OpSource. Although based in Santa Clara, California, OpSource’s cloud technology and capabilities will be sold throughout Dimension Data’s global footprint.

Are Internet infrastructure exits interconnected?

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

freenet: getting paid to sell

Contact: Brenon Daly

In a time when nearly all divestitures are done on the cheap, freenet’s recent sale of its mass-market hosting business Strato generated an unexpectedly rich return for the German telco. In fact, freenet more than doubled its money in the five years that it owned Strato. Back in December 2004, freenet handed over $177m ($107m in cash, $70m in equity) to German network equipment provider Teles for Strato. When freenet shed Strato to Deutsche Telekom (DT) two weeks ago, it pocketed $410m. (Arma Partners advised freenet on the divestiture.)

On top of that return, of course, freenet will hold on to the cash that Strato generated while owned by freenet. That’s not an insubstantial consideration, given that Strato ran at an Ebitda margin in the mid-30% range. We understand that Strato was tracking to about $50m in Ebitda for 2009, up slightly from about $46m last year. Revenue at Strato was also expected to show a mid-single-digit percentage increase in 2009, despite the tough economic conditions in freenet’s home market of Germany. DT’s bid values Strato at roughly 3x trailing sales and nearly 9x trailing Ebitda. That’s a solid valuation for corporate castoffs, which typically garner about 1x trailing sales and maybe 4-5x Ebitda.

Freenet’s divestiture of the Strato hosting business to DT comes a half-year after it sold its DSL business to United Internet, a sale that was also banked by Arma. The company has been looking to shed businesses as a way to pay down the debt that it took on for its $2.57bn acquisition of debitel in April 2008. Since that landmark deal, freenet has focused its operations on mobile communications, and had been reporting the DSL and Strato businesses separately. We understand that there may be additional divestitures by freenet, but they will be smaller transactions for more ‘ancillary’ businesses.

Beijing: unsporting laws on M&A

The opening of the 2008 Beijing Summer Olympics today has the world’s sporting eyes on China. Of course, global dealmakers had their sights on the large (and growing) Chinese markets long before Beijing landed the Olympics. However, as my colleague Anita Cheung notes, those efforts suffered a setback last week when China passed the latest and strictest set of regulations on foreign investment and M&A in 15 years.

The new regulations give the federal government more control over direct foreign investment and take off the table virtually any acquisition of a Chinese company by a foreign firm. Chinese regulators cite national security and antitrust concerns for these recent actions. This is a distressing development for the idea of a global M&A marketplace. While other countries have certainly used regulation to block ‘sensitive’ acquisitions, few have succeeded with a blanket policy blocking essentially all deals.

In the months before these new regulations took effect, several US media and technology companies were able to ink purchases of Chinese companies. For instance, Hearst Business Media acquired ee365.cn, a technology news website for engineers, last month. Also, CNET acquired Beijing-based 55BBS.com in June, while Google picked up Chinese search engine 265.com one month before. And deals aren’t just being inked by US companies. In June, one of Australia’s largest telecommunications companies, Telstra, picked up a controlling stake in two large Chinese Internet companies, Norstar Media and Autohome/PCPop.

Rather than those transactions being models for future M&A activity in China, we would expect to see more deals break down because of politics. In other words, more deals like February’s aborted $2.2bn leveraged buyout of 3Com, which was led by Bain Capital, with minority participation by Chinese networking equipment vendor Huawei Technologies. In that proposed transaction, US regulators got all worked up over the possible threats to US national security of having partial Chinese ownership of 3Com’s TippingPoint Technologies business. The fear was that the Chinese might be able to spy on the US by using TippingPoint’s intrusion-prevention system to gain access to networks. As silly as that seems, it was enough to sink the deal. And unfortunately, China seems to have adopted that as policy.

Recent foreign deals in China

Date Acquirer Target
July 2, 2008 Hearst Business Media ee365.cn
June 27, 2008 Telstra Norstar Media; Autohome/PCPop
June 17, 2008 CNET 55bbs.com
May 26, 2008 Google 265.com

Source: The 451 M&A KnowledgeBase

Ailing AOL no closer to a sale

Although CEO Jeff Bewkes and his Time Warner (TWC) cohorts put a positive spin on the company’s second-quarter results Wednesday, we’d sum up the call as bafflingly uneventful. The company highlighted gains in its TV and movie operations, while remaining virtually silent on its plans for AOL’s legacy Internet access business. If anything, the news concerning the ailing AOL division worsened, with Time Warner indicating that the AOL split is not set to occur before early 2009. The lack of urgency on the part of Bewkes amid declining AOL subscriber count and revenue is extremely disheartening.

Subscriber count at the legacy AOL division fell to 8.1 million subscribers from 10.9 million a year ago. This continues the trend of a year-over-year decline of an average 20-25% since 2003. For the first time in AOL’s history, revenue from advertising tops revenue from its subscription business ($530m and $491m, respectively). Operating income for the AOL division is $230m, one-third of which we estimate comes from subscriptions. This is in contrast to Earthlink (ELNK), which has seen its operating income steadily increase quarter-over-quarter for the past year. EarthLink’s operating income from its most recent quarter was $64m, despite having only 3.3 million subscribers. Clearly, AOL is failing to properly make money from its subscribers. We suggest the company turn the business over to someone who can do that as soon as possible.

Fortunately, there appears to be a suitor for the AOL legacy business. EarthLink CEO Rolla Huff has said he’s ready to discuss a deal. Time Warner should take him up on that immediately. If AOL’s subscriber base continues to decline (and there is no reason to believe it won’t), by the time Bewkes is ready to negotiate a sale, it will be in the six million range. Our advice to Bewkes: Put together a deal book on AOL and get out of the subscription business while you can.

AOL ISP divestitures

Announced Target Acquirer Deal value Price per subscriber
Oct. 2007 Albanian ISP business Telekom Slovenije $5.6m $2,489
Oct. 2006 UK ISP business Carphone Warehouse $712m $339
Sep. 2006 French ISP business Neuf $365m $730
Sep. 2006 German ISP business Telecom Italia $878m $366
Dec. 2005 Argentinean ISP business Datco $1m $67
Feb. 2004 Australian ISP business Primus $18m $200

Source: The 451 M&A KnowledgeBase