Telstra’s unusual, unsurprising Pacnet purchase

Contact: Scott Denne Agatha Poon

Telstra reaches for Pacnet in an uncharacteristic – but rational – deal. The $297m purchase price, at a $697m enterprise value, makes Pacnet a substantially larger target than anything Telstra has bought. According to The 451 M&A KnowledgeBase, Telstra has made six acquisitions (including today’s) this year. Prior to today’s announcement, it had never paid more than $270m in a transaction (a mark it set earlier this year with the pickup of video software vendor Ooyala) in the past 15 years.

Also, like Ooyala and unlike Pacnet, most of its past acquisitions aimed to move the Australia-based telecom giant into ancillary offerings, while the Pacnet buy supplements a core business. Earlier this year, Telstra bought Ooyala as well as a video ad serving business, Videoplaza, to supplement that. It inked two acquisitions to bolster its healthcare software offering, after having scooped up the foundational piece of that business with the 2013 reach for Database Consultants Australia’s eHealth division. Telstra was a muted acquirer from 2010-2012, but even in its earlier phase of active M&A (11 deals between 2004-2009), it largely focused on snagging Asian Web properties.

With Pacnet, Telstra is obtaining assets such as datacenters and fiber and undersea cables that support its ambition to make the company a strong regional and global player in enterprise services, which is already a $4bn business annually.

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Zayo’s zesty debut

Contact:  Scott Denne

Despite pricing below its target range, Zayo Group receives a warm reception on Wall Street. The fiber services and colocation vendor was trading up about $22 per share (roughly the midpoint of its proposed range) from its $19 IPO price, giving it an enterprise valuation of $8.09bn (7.2x TTM revenue).

Considering Zayo’s organic growth was just 6% in each of the past two years, that’s a healthy multiple, putting it well ahead of others in the colocation and network services sectors, though the diversity of the company’s business – which includes dark fiber, mobile backhaul networks and colocation – makes a direct peer tough to find. Ironically, the best available comparison for Zayo’s valuation is Zayo itself: in 2012, it took AboveNet private in a $2.2bn deal – the largest of the 32 acquisitions it has made since 2007 – at 4.5x trailing revenue.

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As HP looks to set back into M&A market, who’s on its short-list?

Contact: Brenon Daly

Now that Hewlett-Packard is once again growing organically, we’re hearing that the tech giant is looking to grow inorganically once again, too. Several market sources have indicated in recent days that HP has pursued a large network platform play, as well as a smaller round-out for its application security portfolio.

Before we look at the specifics of each rumor, it’s worth noting the fact that any acquisition would be a dramatic reversal from the company’s recent stance. Since its disastrous purchase of Autonomy in mid-2011, HP has stepped almost entirely out of the M&A market, announcing just a pair of small transactions. For comparison, IBM has inked more than 30 deals in the same three-year period, according to The 451 M&A KnowledgeBase.

So who is HP supposedly eyeing? Well, both Blue Coat Systems and WhiteHat Security would bring a dash of color to the company.

Of the two rumored deals, we think the larger one – Blue Coat – is less likely, if just because a more measured return to dealmaking after a three-year hiatus would probably play better among investors, who have bid HP shares up to a three-year high. Blue Coat, with its diverse networking and security product portfolio and headcount of more than 1,400, would also pose a number of integration challenges to a company that is still working through the last big transaction it did. Furthermore, it would likely cost HP more than $2bn.

More reasonably, WhiteHat would likely cost HP only about one-tenth that amount and would be a relatively low-risk expansion to the company’s existing portfolio by bolstering its security services. HP already offers application security, a portfolio built primarily via M&A. HP acquired Web app testing startup SPI Dynamics in June 2007, and then added Fortify Software in August 2010. Fortify, which had a relatively strong partnership with WhiteHat before its sale, stands as one of the few recent deals that HP has done that has actually generated the hoped-for returns.

Survey: Ma Bell won’t get ‘churned’ with DirecTV

Contact: Brenon Daly

AT&T’s planned $48.5bn purchase of DirecTV has one thing going for it that Comcast’s similarly sized acquisition of Time Warner Cable doesn’t: customers don’t necessarily hate the providers. That’s at least one way to handicap the outlook for the two proposed pairings, which total, collectively, about $94bn in transaction value. The two deals represent the second- and third-largest tech transactions since 2003.

In the end, the return on both of these mammoth bets by telcos will be determined by how well the new owners serve customers. On that count, AT&T – both by itself and with the addition of DirecTV – has much more goodwill among TV consumers that Comcast-Time Warner Cable, according to ChangeWave Research, a service of 451 Research. In a March survey of 4,375 North American residents, about one-quarter of respondents said they are ‘very satisfied’ with AT&T U-verse and DirecTV. That was more than twice the level that said they are very satisfied with Comcast (11%), and four times the level for last-placed Time Warner Cable (a paltry 6%).

Perhaps more importantly, the ChangeWave survey indicates that TV subscribers aren’t planning to stick with the service they don’t like. (We would note that for service providers, which rely on monthly billing subscription fees to offset huge capital expenditures, churn is particularly corrosive to business models.)

According to ChangeWave, one in eight respondents said they plan to switch from either Comcast or Time Warner Cable in the next half-year – half again as many who planned to jump from either AT&T U-verse or DirecTV. And where are the dissatisfied TV subscribers likely to look to get their fix of The Real Housewives of Orange County or SportsCenter ? Well, it just so happens that DirecTV and ATT U-verse are the most likely replacement service providers, according to ChangeWave.

CW TV switch


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Vodafone continues consolidation in Europe with Ono acquisition

Contact: Scott Denne

Vodafone picks up its second cable company in a year, spending $10bn on a cash- and debt-free basis on Spain’s Grupo Corporativo Ono amid an uptick of telecom consolidation in Western Europe. The deal has similarities to Vodafone’s $10.2bn purchase in June of Germany’s Kabel Deutschland.

Both transactions get Vodafone deeper into markets where it already offers some services, such as mobile and Internet access. However, the rationale for the two deals is different. While both add to the top line, the chance to grow revenue seems to be front and center in the Ono buy, where Vodafone sees an opportunity to market wireless services to the target’s customers and take share from Telefonica, which powers Ono’s existing mobile service, by transitioning those customers to Vodafone’s network. With the Kabel purchase, much of the logic for the deal came in the opportunity to lower costs by migrating Vodafone DSL customers in Germany onto Kabel’s coaxial network.

Vodafone’s move comes during a period of extraordinary consolidation of large telcos in Western Europe. So far this year, three telcos in that region have sold for more than $500m (including today’s announcement), for a total of $19.2bn of M&A. In all of last year there were four such transactions, combining for $32.2bn. In the preceding five years combined, such deals totaled only $22.2bn, according to The 451 M&A KnowledgeBase.

The hunt for additional revenue growth and cost savings comes as prices for wireless services in Europe are declining, and will continue to decline. The pricing pressure will amplify the need for further consolidation. In its most recent quarter, Vodafone’s own revenue fell 3.6% from a year earlier to $15.1bn, a drop that its management attributed to stiffer price competition. In Spain in particular, Vodafone’s revenue declined 14% due to increased competition from services offering combined wireless and wireline packages. Yankee Group, a unit of The 451 Group, anticipates that price squeeze in Europe will continue.

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DT makes $735m move into Eastern European B2B

Contact: Scott Denne

Deutsche Telekom hands over $735m for GTS Central Europe in a deal that brings a geographically unique set of fiber and datacenter assets but little growth. The move plays into DT’s desire to build its B2B offerings that service a set of customers beyond its base of Germany-based multinational corporations.

GTS has both fiber networks and datacenters across multiple countries in Eastern and Central Europe, making it the region’s only multi-country, multi-tenant datacenter business, according to a 451 Research report. That reach is valuable to the German telecom giant because it needs fixed-line networks and datacenters to go along with its wireless-only services in the region, especially in countries such as the Czech Republic and Poland.

GTS’s Slovakia operations, where DT already has fixed-line network assets, are not included in the deal. The portion of the business that is going to DT posted $459m in revenue and EBITDA of $115m last year.

Despite its geographic reach in its home market, GTS hasn’t grown since its acquisition by a consortium of private equity investors in 2008. The year before that transaction, it reported $587m in revenue – a mark it hasn’t hit since, which DT attributes to tight regulations and difficult economic conditions in Europe. Last year, GTS as a whole, including its Slovakia operations, reported $511m in revenue and EBITDA of $136m.

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