2014/10/02 Synergies in fixed–mobile transactions can be substantial, but are not easy to quantify or realise

Fixed–mobile convergence (FMC) has been a hot topic for a long time, but some significant transactions have taken place in the past three years, indicating an increase in momentum (see Figure 1).1 FMC-driven transactions are often based on industrial synergies between the fixed and mobile operations, which can be on either the revenue or the cost side. In this article, we explore the areas for industrial synergies, to establish how real and achievable they may be and how they can be evaluated as part of a transaction.

Figure 1: Examples of fixed–mobile convergence-driven transactions, with announced transaction values and synergy estimates [Source: Analysys Mason, Altice, Vodafone and Zon, 2014]

1 Numericable – SFR transaction value excludes potential additional considerations.

Revenue synergies are difficult to assess and evaluate

Revenue synergies can include the following.

• Service convergence between telecoms, TV and mobile services typically manifests itself through cross-selling, either through integrated bundles (quadruple-play, for example) or through less-formal bundling. Having the same provider for a set of services can, even without formal bundling, provide benefits for the end user (such as receiving a single bill) and be presumed to increase customer loyalty.
• Economies of scope: The distribution networks of both involved parties can be used to sell additional products, which should lead to more efficient use of the distribution network.

Revenue synergies can be substantial but are difficult to assess because of a need to compare with a counterfactual that needs to be defined (once the transaction has taken place the revenue of the separate parties cannot be compared with the revenue of the merged entity). The other problem with this is that during the transaction phase the incentive of both parties is to overstate their revenue forecast and understate the one of the counterparty, which makes agreement on forecasts for the separate entities very difficult.

There can also be trade-offs; the main benefit from commercial convergence should, for example, be up-sell and churn reduction, but in order to achieve this bundles typically need to be sold at a discounts compared to the sum of their components.

Cost synergies are more tangible, but can still be difficult to achieve

Cost synergies can come from the following.

• Economies of scale, which can take different forms.
  • Reduction of future procurement costs from increased negotiation power – similar to revenue synergies, but this requires a comparison with a counterfactual.
  • Elimination of duplication of assets and functions, and more efficient use of them. This can encompass a reduction in staffing levels but also network and asset optimisation – there will typically be overlapping core networks, billing systems, interconnect platforms, various IT systems and distribution networks.2
• Technological convergence is becoming an increasingly interesting driver through the advent of LTE.
  • LTE can be used to provide fixed wireless broadband services in low-density rural areas. A merged fixed–mobile operator can therefore, in certain geographic areas, replace wholesale broadband access (WBA)-based broadband3 with LTE (at lower variable cost) or extend its coverage (the case for cable operators, for example). In cases where the mobile operator already offers some fixed services the benefit can be even greater because the fixed subscribers of the mobile operator can be migrated to the acquired network.
  • LTE networks require fibre for backhaul from mobile sites – integration with operators with significant fixed networks can provide faster and less-costly access to fibre backhaul.

Cost synergies are typically more tangible, quantifiable and realisable than revenue synergies. However, they may require integration investments and effort to achieve. Furthermore, a proper evaluation would require a detailed data-based analysis, which can be difficult to fit into a due diligence because of timing constraints and access to granular data.

There is a real potential for achieving revenue and cost synergies in fixed–mobile convergence-driven transactions. Cost synergies are more tangible and measurable than revenue synergies, but the quantification of these synergies is not straightforward and requires detailed analysis. Cost synergies can therefore be incorporated in the transaction value, whereas revenue synergies are better treated as a future upside.

Source: Analysys Mason