2014/10/03 Mobile network sharing as a route to in-market consolidation in the telecoms market

Mobile network operators (MNOs) have publicly supported being able to merge with other businesses in the same country. Scale is critical if MNOs are to compete for 4G licences and roll out networks and services in line with those of their competitors. At the same time, operators are under pressure to reduce costs in order to address the margin impact of flat or declining revenue. This article argues that under certain conditions, network sharing can be an attractive alternative to M&A, achieving a large proportion of the same cost benefits (synergies), typically with lower regulatory hurdles and the opportunity for a gradual step-by-step approach as opposed to an 'all-or-nothing' transaction.

In-market M&A is expensive and time consuming, and success is uncertain

M&A deals are constructed on the basis of cost synergies and market repair. The recent approval of Telefónica's acquisition of E-Plus notwithstanding, the European Commission's concerns – and those of national regulators – regarding market synergies are well documented. In Ireland, the Commission mandated strict remedies that significantly curtailed the potential size of any market synergies. Recent press reporting (for example, in the Financial Times) suggested significant opposition from national regulators to remedies that were perceived to be too lenient. The experience of rising retail prices as a result of recent acquisitions will still be fresh in the minds of national regulators.1

Moreover, our experience has shown that while in-country M&A has led to improved profit margins for the merged business, this has, in most cases, come at the price of a loss of market share.2 Finally, it stands to reason that in the case of Three Ireland's acquisition of Telefónica Ireland, the remedies will increase mobile price pressure by enabling cable operator UPC Communications Ireland to enter with converged multi-play offers under a fixed-rate capacity MVNO model.

In summary, significant uncertainty and questions remain, and operators will need to carefully assess the arguments for and against M&A compared to those of network sharing.

Network sharing offers a lower-risk route to cost synergy realisation

Network synergies account for a large share of the total value of recent M&A deals in the telecoms market (see Figure 1). In the example of Telefónica's just-approved acquisition of E-Plus, network synergies are estimated at a net present value (NPV) of approximately EUR3 billion and account for 68% of total cost synergies (55% of overall synergies).

Figure 1: Synergy value analysis for the Telefónica–E-Plus merger [Source: Telefónica, 2014]

Network sharing can afford operators many of the same cost synergies as in-market M&A (see Figure 2) – deep network sharing, based on a NetCo model and transferring existing 2G/3G network assets into the joint venture (JV), enables the JV to consolidate sites to a single grid, share backhaul, transfer and consolidate network operation and maintenance activities, and optimise the pace of consolidation, equipment refreshes and new deployments (for example, single visit, SRAN).

Figure 2: Key sources of network cost synergies [Source: Analysys Mason, 2014]

Network sharing deals have been subjected to much less onerous regulatory and competition reviews and conditions than in-market consolidation deals. The participating operators continue to compete for customers in the retail and wholesale markets. A wave of network outsourcing has convinced regulators that networks and services can increasingly be seen as separate. Customers benefit from improved coverage, in particular in rural areas.

In deep network sharing agreements, the complexity of unwinding the agreement and (closely intertwined) networks – should that ever become necessary – rises exponentially. Network sharing deals do not prevent subsequent acquisitions by a third party (for example, Three Ireland's acquisition of Telefónica Ireland), but they increase the barriers, while also reducing the pressure for the sharing partners to merge.

Deep network sharing agreements – active sharing, NetCo, consolidation – are a viable route to realising a significant proportion of the cost synergies normally associated with in-market M&A. The complexity of sharing agreements and the implications on the operators' subsequent M&A option space require careful assessment by board-level executives.

Analysys Mason has a strong track record advising mobile operators, regulators, and financial institutions worldwide, building on our deep commercial and technical expertise. We support clients in assessing, valuing, structuring and implementing network sharing agreements between mobile operators – as an alternative to in-market consolidation, to realise cost synergies, as joint bid vehicle in next-generation spectrum auctions, and in shaping appropriate regulatory frameworks.

Source: Analysys Mason