Telco buys and sells

by Scott Denne

M&A activity among telcos is surging as phone, internet and wireless service providers increase both their buying and selling amid a general, though not complete, movement back toward their core markets after a streak of investments in ancillary tech sectors. Just this month alone, three carriers have unwound deals and scaled back their venture units. Still, acquisitions by carriers have hit their highest level since 2015.

According to 451 Research’s M&A KnowledgeBase, telcos have spent a collective $96bn on tech M&A this year, nearly four times the total spending among those acquirers in all of 2017. At the same time, publicly traded telcos have sold assets worth a combined $19.5bn, or twice the amount they sold in 2016 and 2017 combined.

Telstra is among the most recent sellers as it shed its $270m bet on Ooyala, a video streaming software vendor, in a sale to the company’s management. Alongside that transaction, it announced a restructuring of its venture arm, a move that reflects the recent decision by Rogers Communications to do the same. Telstra’s decision is part of a broader restructuring plan to cut costs and focus on customer service to return to growth (the Australia-based carrier’s topline declined 5% in each of the past two quarters).

Similarly, Sprint decided to divest its Pinsight Media unit in a sale to ad network InMobi. Like Telstra, Sprint is doubling down on telecom services – although in Sprint’s case, that’s taking the form of a $26.5bn sale to T-Mobile, a carrier that’s shown little appetite for moving beyond communications services. But that’s not to say that all carriers are sticking to the markets they know best.

Most notably, AT&T, following its massive $85bn pickup of Time Warner, has increased its acquisitions in digital media, ad-tech and even network security – its purchases of AppNexus and AlienVault account for more than half of the $3.6bn that telcos have spent this year on ancillary technologies. Given the recent failures of its competitors, not to mention the many abandoned forays into datacenters earlier in the decade, it’s tempting to take a dim view of bets in media and advertising.

Still, AT&T, as well as Comcast and Verizon – which made similar, earlier acquisitions in media and advertising – haven’t been the best stewards of their core businesses. There’s scant evidence to suggest that focusing strictly on their legacy business would be without its own risks. Multiple surveys by 451 Research’s VoCUL show consistently low levels of customer satisfaction among phone and TV service providers. For example, mobile services from Sprint and Verizon have trended down over the decade while AT&T has demonstrated little growth, with just 24% of customers saying they’re satisfied with the current service (only T-Mobile has posted long-term gains on that front).

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

CenturyLink connects with Level 3 in 2016’s largest telecom deal

Contact: Mark Fontecchio

CenturyLink makes a move to the other side of the deal table, shelling out $24bn for Level 3 Communications in an attempt to expand its portfolio of business services as the datacenter market awaits an announcement on the fate of the company’s colocation business. Today’s transaction marks a big bump in telco M&A spending for the year. The acquisition is 2016’s largest telecom consolidation play by a factor of 10, although it would be less than half the biggest in either 2015 or 2014.

The purchase is uncharacteristically sizable for CenturyLink, which had a market cap of about $16bn before the announcement. The company had only paid beyond $10bn once before, when it bought Qwest Communications in 2010. Its next-largest purchase, the $5.8bn reach for EMBARQ in 2008, was a similar pickup of a consumer-focused telco. Most of CenturyLink’s recent investments have aimed to bolster its business services. Yet the only time it’s spent more than $1bn on such an effort was the $2.5bn acquisition of Savvis in 2011, some of which could be undone when it finishes exploring ‘strategic alternatives’ for its shrinking colocation unit – a process that it says will still wrap up this quarter.

CenturyLink will pay 60% of the cost of Level 3 in stock and the rest in cash. That dilution helped push the company’s stock price down 12% following the deal announcement. Including debt, the purchase values the target at $34bn, or 4.1x trailing revenue. That’s the second-highest multiple among the nine $10bn+ telco deals in the past half-decade, according to 451 Research’s M&A KnowledgeBase. The healthy valuation is certainly not due to recent growth, as Level 3’s revenue is flat.

What CenturyLink does obtain is an international footprint (20% of Level 3’s revenue is generated outside the US), an extensive fiber network and expanded revenue from businesses. Inclusion of Level 3’s revenue bumps CenturyLink’s enterprise sales to 75% from 64%. This acquisition is being driven as much by financial considerations as strategic ones. CenturyLink will inherit $10bn of net operating losses and gain an estimated $975m in cost reductions when the transaction closes, which is expected in the second half of next year.

The deal is the third-largest telco consolidation play in the past eight years, behind Charter Communications buying Time Warner Cable and AT&T nabbing DIRECTV. It significantly expands what had previously been a lean year for telecom M&A, with this single transaction nearly doubling the total amount that telcos have spent on acquisitions in 2016, to about $50bn. Compare that with 2014 and 2015, during which telcos spent an average of $150bn on purchases, according to the M&A KnowledgeBase.

Bank of America Merrill Lynch and Morgan Stanley advised and Evercore Partners provided a fairness opinion to CenturyLink on the deal, while Citigroup Global Markets advised and Lazard provided a fairness opinion to Level 3.


AT&T pays $85.4bn for Time Warner amid strong demand for original content

Contact: Scott Denne

Original content plays a starring role in telecom’s future as AT&T shells out $85.4bn for Time Warner. Facing competitive pressures in its core wireless business – revenue was down year over year in that segment last quarter – AT&T plans to leverage Time Warner (owner of HBO, Warner Brothers Studios and Turner Networks, among other properties) to provide original content for the latest online content distribution properties, such as its forthcoming streaming service, DIRECTV Now.

The availability of commercial-free, on-demand content initially drew eyeballs to streaming services such as Netflix, Hulu and Amazon Prime. As troubling as that was for TV and Internet service providers to watch, it was just a remake of the distribution of content – a business where they’re comfortable. Increasingly, though, as surveys by 451 Research’s VoCUL show, original content is the draw. In our most recent survey in June, the number of Netflix subscribers that cited original content as an important factor in their subscription rose seven points from December to 34% – the same percentage of subscribers to Time Warner’s HBO streaming service also cited original content. (Only Showtime had a higher percentage, with 36%).

Differentiated content comes with a substantial price tag. AT&T will spend $85.4bn in cash and stock (split evenly) to acquire Time Warner. After bolting on Time Warner’s existing debt, the target has an enterprise value of $106bn, or 3.8x trailing revenue. That’s almost a turn higher than the valuation of Walt Disney, a company with growth in the high-single digits (compared with Time Warner’s slight declines this year). AT&T has taken out a $40bn bridge loan to fund the transaction, which it expects to close next year. When it does, AT&T expects to continue to operate the acquired business as a separate unit with the same management team.

For Time Warner, the deal provides a way out of a challenging time for high-end content producers. When quality content was pricey to create and distribute, Time Warner and a handful of others could claim a monopoly on consumer attention. That’s no longer the case. Coupled with that, trends in advertising are beginning to favor entities that can provide targeted audiences – something AT&T plans to pursue with this move. For now, advertisers still look toward networks to reach large-scale audiences. But Time Warner and others, which have no direct links to their audiences, are at risk of being disintermediated by content distributors and service providers. In that respect, it makes sense for Time Warner to make a hedge against this trend by linking up with AT&T. It also helps explain why Time Warner management had little interest in a slightly smaller bid from 21st Century Fox in 2014.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA

Verizon strikes $4.8bn deal for Yahoo’s core biz

Contact: Scott Denne

Verizon moves to augment its media business with the $4.8bn purchase of Yahoo’s central assets. The deal, which wraps up years of speculation about Yahoo’s future in the new media landscape, will see its core business and operations head to Verizon to be integrated with AOL, while its investments and other assets will stay behind in a company that will be renamed and restructured as a publicly traded, registered investment entity.

Aside from licensing revenue from some of the noncore patents that Yahoo will keep, nearly all of its $4.9bn in trailing revenue will head over to Verizon. The transaction values the target’s assets at about 1x trailing revenue, compared with the 1.6x that Verizon paid for AOL last year. The discrepancy in value reflects the depth of the comparative technology portfolios. Both vendors spent heavily on ad network businesses in the back half of the past decade and early years of this one. More recently, AOL turned its investments toward programmatic, attribution and other advanced advertising technology capabilities. Yahoo doubled down on content while its ad network technologies aged.

This move is all about scaling Verizon’s media footprint. Both Yahoo and AOL have roots in the Web portal space. And both are selling to Verizon for similar prices. But Yahoo’s media assets are substantially larger. AOL generates roughly $1bn from its owned media properties – Yahoo pulls in 3.5x that amount. Owning Yahoo’s media properties will enable Verizon to offer greater reach to advertisers and therefore land bigger deals and at better margins than the ad network revenue that made up almost half of AOL’s topline. Also, having a larger audience for its owned properties will provide AOL’s ad-tech business with more data that it can use to improve its audience targeting.

Telecom services is a saturated market with few net-new customers. Most growth comes from winning business away from competitors. With this acquisition (and AOL before it), Verizon plans to leverage its investments in mobile bandwidth and distribution – its existing mobile and TV customers – to find growth in the digital media sector. According to 451 Research’s Market Monitor, digital advertising revenue in North America will increase 12% this year to $40.6bn, compared with just 4% growth for mobile carrier services.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Vonage pushes further into business communications with Nexmo buy

Contact: Mark Fontecchio

Vonage pays $230m for Nexmo, which offers enterprise voice and text messaging APIs. The deal, Vonage’s largest in 451 Research’s M&A KnowledgeBase, pushes the VoIP provider further into the realm of unified business communications. Vonage has now spent about $600m on M&A in the past few years to pivot from a consumer-focused VoIP supplier into a business communications vendor. The gamble has paid off, with the company’s overall sales growing once again and its business revenue jumping exponentially.

Nexmo is Vonage’s biggest reach yet. Its previous nine-figure (or close to it) acquisitions – starting with Vocalocity in 2013, Telesphere Networks in 2014 and iCore Networks last year – involved business-focused VoIP providers, so Vonage stayed within its wheelhouse. With its cloud-based voice, messaging and chat APIs, Nexmo broadens Vonage’s horizons into business communications services, helping companies more easily embed voice and messaging services within their mobile apps. For that privilege, Vonage is paying a healthy multiple on Nexmo’s trailing 12-month revenue (see estimate here). The multiple is Vonage’s highest to date and one of the largest we’ve seen in mobile messaging and application development. Nexmo’s revenue is also growing at a fast 40% clip, according to Vonage.

Vonage’s overall sales grew 3% to $895m last year, but its business revenue more than doubled to $219m. Two years ago, the company had $8m in business revenue. Now its business revenue is higher than all of rival 8×8’s sales. By our math, at least three-fourths of that increase in business revenue came from its purchases of Telesphere, iCore and SimpleSignal. Meanwhile, its consumer revenue dropped 12% to $676m. Vonage’s challenge has been – and will continue to be – how quickly it can replace its disintegrating consumer revenue with business dollars, whether that be through continued M&A or more organic growth.


Cloud calling: With latest deal, BroadSoft aims to entice enterprises to cloud UC

Contact: Scott Denne

The transition to consumer VoIP and other Internet Protocol communications is well under way, though at the largest enterprises the market for IP-based communications still has plenty of room to grow. Capturing more of that opportunity led BroadSoft to today’s purchase of Transera, a maker of call-center software and analytics. BroadSoft sells software and SaaS that enables telcos to replace their customers’ hardware-based PBX systems with IP-based unified communications services. By expanding its call-center offering, BroadSoft hopes to make its software more appealing to the largest consumers of communications services.

BroadSoft is a frequent acquirer of modest-sized companies. Since the start of 2015, it has inked four acquisitions of such firms to expand internationally and add new products to its portfolio. It hasn’t spent more than $40m in cash annually on M&A in each of the past few years. The pickup of Transera seems to be a similar scale – BroadSoft expects the target to add $7- 8m in revenue for 2016 and to be mildly dilutive to earnings.

As businesses march toward more hosted and IP-based communications systems, vendors and service providers in this space are looking for ways to differentiate beyond basic phone services and give larger organizations a more compelling reason than cost to embrace cloud communications. That was the rationale behind RingCentral’s reach for collaboration platform Glip last year, as well as BroadSoft’s own internal collaboration effort, Project Tempo. Moving beyond calls and call routing has also spurred a push for greater call-center capabilities, a move that’s been reflected in deals from BroadSoft’s rivals: ShoreTel closed the acquisition of Corvisa earlier this year to expand its presence in this sector and 8×8 snagged a pair of call-center companies last year.

For BroadSoft, offering improved call-center analytics isn’t just about winning cloud communications business from competitors – it’s also about getting large businesses onto the cloud to begin with. According to one of 451 Research’s Voice of the Enterprise surveys , 81% of IT departments that had recently deployed unified communications (voice, video and messaging) did so on-premises. That was the highest level of on-premises deployments of any application category in the survey and suggests to us that BroadSoft and its peers will need to find more applications that are unique to the cloud if it wants to entice the largest companies onto it (55% of the respondents to the survey come from enterprises with more than 10,000 employees).

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Comverse augments digital services portfolio with Acision purchase

Contact:  Scott Denne Declan Lonergan

Comverse comes off the divestiture of its BSS division to make its largest – and only significant – acquisition in nine years. The mobile service systems vendor is paying $135m in cash, $75m in stock and a $35m earnout to acquire Acision. The deal carries an enterprise value of $367m – Comverse will take on $157m in Acision debt – and values the target at 1.9x trailing revenue.

The multiple is well below the median for software M&A, as Acision has struggled to diversify its business beyond SMS messaging. Comverse hasn’t been immune to those struggles. In fact, its business commands just 0.7x trailing revenue on the public markets. Comverse’s management anticipates that this deal will enable it to return to growth by 2017.

As mobile operators’ revenue from traditional voice, voicemail and SMS continues to decline, both Comverse and Acision have been pursuing strategies based on diversifying their own businesses to address the operators’ changing requirements. Acision has improved its competitiveness in mobile messaging while also steadily expanding into new areas such as white-label OTT apps and enterprise messaging. The fit with Comverse, which remains a leader in voicemail but is also expanding in digital services, should be good. Though there may be overlap in some operator accounts, the combined entity will be a strong and credible player in delivering a broad suite of communications and digital service products to operators in all major regions.

We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Size matters: Charter acquires Time Warner

Contact: Kenji Yonemoto Rich Karpinski

Charter Communications’ purchase of Time Warner Cable for $56.7bn and its recent acquisition of Bright House Networks for $10.4bn are both about taking its traditional cable/fixed broadband business to the next level by scaling a national player (and the latest with a cutthroat CEO in cable legend John Malone). The move also cuts off an aggressive competitor at the pass, as France-based Altice last week made an offer for US-based cable operator Suddenlink Communications and floated the idea of going after Time Warner itself.

The key will be finding the right mix of traditional cable service, broadband-fueling OTT and content deals flowing across each and every access medium. In all of these endeavors, scale helps tremendously – as AT&T is pursuing with its $48.5bn DIRECTV buy, Verizon with its aggressive OTT video plans and $4.4bn AOL pickup, and Comcast with… well, Comcast looks like it’s going to need its own second act (with perhaps a landscape-changing mobile merger being just the ticket, though we’ll leave that conjecture for another day).

Will this latest telecom deal get done? The impact will certainly be more ‘pro-competitive.’ With today’s purchase, Charter will grow to 24 million subscribers, compared with Comcast’s 27 million – making this acquisition a much different proposition than the ‘big getting bigger’ via the abandoned Comcast-Time Warner combination.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

After dating, InfoVista marries the girl from Ipanema

Contact: Brenon Daly

Announcing its third – and largest – acquisition since its take-private in 2011, InfoVista has paid an undisclosed amount for Ipanema Technologies. The deal between the two France-based companies, which had an existing technology partnership, extends InfoVista’s core network performance management to the applications that run on them. Founded in 1999, Ipanema is primarily known for its WAN optimization offering.

The purchase also brings InfoVista, which does virtually all of its sales directly, Ipanema’s sales channel. Ipanema goes to market primarily through more than 50 partners, including many of the large Western European communication service providers such as Telefónica and BT. Altogether, it serves some 750 enterprise customers. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for Ipanema’s revenue here.) We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Telcos get busy again with M&A in February

Contact: Brenon Daly

Massive acquisitions by telcos, which pushed M&A spending to a recent record in 2014, once again helped to inflate the value of deals announced in the just-completed month of February. Overall, tech and telco acquirers spent $48bn on transactions across the globe, according to The 451 M&A KnowledgeBase. However, the three largest deals, which were all telco-related purchases, accounted for $30bn, or 60%, of the total spending in February.

Last month’s big-ticket acquisitions by BT Global Services, Frontier Communications and American Tower revived the telco shopping spree from 2014. Last year, telco and media purchases accounted for roughly half of the $439bn we tallied in M&A spending – the highest level in 14 years. (See our full report on M&A last year, as well as the outlook for this this year.) There were no significant telco transactions in January, which is one of the main reasons why M&A spending for the first month of 2015 was just one-fifth the amount spent in the second month of 2015.

Beyond the telco consolidation, there are clear indications that the broader tech M&A market is picking up the pace after the slow start. Expedia did its largest-ever deal last month, announcing the $1.4bn pickup of Orbitz Worldwide. And Canon, an infrequent acquirer, inked a $2.8bn buy. Even excluding the trio of telco deals, there were four transactions in February valued at more than $1bn – twice as many 10-digit acquisitions announced in January.

Additionally, the overall volume of M&A remained high in February. We tallied 331 transactions announced last month. That’s nearly one-third more than February 2014 or February 2013. Shoppers included Check Point Software, which announced its first acquisition in more than three years; four purchases by the insatiable acquirer Google; and a double-barrel set of deals by Under Armour.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.