TME the way we see itCommunications Industry: On theverge of massive consolidationAs the US are entering into a likely final phase of consolidation, Europe is engaging intoa series of M&As which will be a major characteristic of the communications market forthe next 10 years.

The information contained in this document is proprietary. 2014 Capgemini. All rights reserved.Rightshore is a trademark belonging to Capgemini.

TME the way we see itAs of 3 July 2014,as many as 79 dealswith a total dealvalue of US 230 billion havealready been announced.Of these more than US 100 billion are announced invarious European markets.We strongly believe thatthe deal activity is going tosee still stronger action. Weestimate that in 2014 alone,the total number of dealsand total deal value is goingto double.”IntroductionIn the recent past, the communications industry has been announcing several M&Ainitiatives at an unprecedented pace, with a mix of both large multi-billion dollardeals, and smaller operations. As there are several structural drivers underpinningthis consolidation move, we – as many of our peers – anticipate that by 2020 theglobal communications services providers1 (CSPs) landscape will see a spectacularchange. The communications market in the US would likely be dominated by threemajor operators, while Europe would have seen a significant part of its consolidationjourney around a handful of European and non-European aggregators.While this may seem like an old story for the communications industry, we have to bemindful about the first consolidation wave that began in the US in 2004 (i.e. 20 yearsafter the disbanding of the AT&T monopoly) and resulted into the four-major-operatorlandscape of today. The industry in the US is now entering into a further, probablyfinal, stage of consolidation. With Verizon already consolidating through the buyout ofits ownership from Vodafone, other industry behemoths will soon follow suit. Alreadythe recent moves by the top industry players – Comcast with its intended acquisitionof Time Warner Cable and AT&T with its US 49 billion offer to acquire DIRECTV –indicate that the consolidation wave in the US is heading for a conclusion.CSPs include telecommunications carriers,cable service providers, satellite broadcastingoperators and communication service providersover internet1Telecom M&A Market History & Size250First wave of massive telecomconsolidation began in the U.S.The next wave ofindustry consolidationwill be led by Europe500.0200400.0150300.0100200.0Number of dealsValue of deals (US Billion)600.050100.00200320042005Completed deals200620072008Pending deals200920102011Capgemini estimates2012 2013 2014*Number of dealsSource: Bloomberg accessed on 4 July 2014, Capgemini TME Lab Analysis* Data for 2014 is until 3 July 2014; the data for 2014 exhibits completed and pending deals; the data for 2014 is annualized to show the potentialfor more consolidation in current year. Data for 2013 and 2012 exhibits pending deals in addition to completed dealsYear as per announced date of the deals. Based on deals where acquirers OR sellers OR targets are telecommunication service providers andhave disclosed deal values greater than US 100 million3

A new wave of consolidation – this one is going to be massive – is also building upon the European shores. Deal proposals in several key markets in the recent past,improving market conditions and changing regulatory mindset strongly indicate thatthat a strong wave of M&A activity in the telecom sector is about to be unleashed.In the deals announced or completed so far it is clear that major telecom operatorshave plenty of appetite to consolidate.From a global standpoint, as of 3 July 2014, as many as 79 deals with a total dealvalue of US 230 billion have already been announced. Of these more than US 100billion2 are announced in various European markets.From this point on, we strongly believe that the deal activity is going to see stillstronger action. We estimate that in 2014 alone, the total number of deals and totaldeal value is going to double. We expect this trend is going to continue over the nextdecade, where most of key European operators would have an “X-to-three-operatorplay, i.e. most of the national markets will have a three operator landscape.Apart from possible costsaving, there are otherfactors that are fuelingconsolidation amongEuropean telecoms.These include attractivevaluations, availability ofdebt at low interest rates,and the willingness ofmore and more banks tounderwrite huge amountsof debt to ensure thatdeals get through.The drivers for consolidationWith the focus on minimizing costs to reduce impact on margins, operators will beincreasingly inclined towards consolidation as a strategy to overcome challengingmarket conditions.Apart from possible cost saving, there are other factors that are fueling consolidationamong European telecoms. These include attractive valuations, availability of debt atlow interest rates, and the willingness of more and more banks to underwrite hugeamounts of debt to ensure that deals get through.Mobile operators in Europe are looking to augment their service offerings byacquiring fixed line or cable operators that would enable them to offer quad-playservices, whose uptake has been increasing in Europe. The quad-play offering wouldenable the operators to lower the churn and thus, reduce customer acquisition costsin a saturated mobile market. As a result, the European telecom market is witnessinggreater consolidation between mobile and fixed/cable operators.Beyond the above objectives, one of the key drivers for this renewed zeal andoptimism is the improving market environment which will see a steady stream ofinvestments in the foreseeable future. This, in addition to the changing regulatorymindset is expected to unshackle the over-regulated business environment.Even though regulators in each region are faced with a challenge identifying thenumber of operators that can optimally serve the market, the situation in two keymarkets - US and China - indicate that scale is the fundamental driver for the nextgeneration telecom operations. The US has, as mentioned earlier, re-consolidatedtheir industry in the past 10 years to four players, who together control 90% of themarket. China has done well to develop a strong telecommunications servicesmarket with three national operators that serve more than one billion subscribers.In comparison, while a majority of the subscribers in Europe are served by the fourbiggest providers - Telefónica, Vodafone, Deutsche Telekom and Orange – theEuropean market is very fragmented with over 100 fixed and mobile operators whichin turn owns dozens of companies.4 Deals included proposed, pending andcompleted deals2

TME the way we see itIn developing markets, regulatory uncertainty and a strong competition is drivingARPU3 to unsustainably low levels and thus preventing large global telecomoperators from entering such markets. However, in countries like India, revised M&Aguidelines and spectrum policies is likely to spur consolidation in the telecom marketthat has more than 15 operators currently.Overview of recent andon-going M&A dealsA large majority of the high-value telecom deals completed over the past year, orwhich are in the pipeline, are in the US These include Verizon’s agreement to buyVodafone’s 45% stake in Verizon Wireless for US 130 billion in one of the largesttelecom deals globally. In the country, leading telecom operators are consolidatingtheir position in the market as exemplified by AT&T’s acquisition of Leap Wireless andT-Mobile’s acquisition of MetroPCS. Japanese operator SoftBank entered the UStelecom market by acquiring Sprint for US 21.6 billion with the promise of innovationin mobile service pricing and device offerings, will give customers more options formobile services. Not only that, SoftBank is also planning to acquire T-Mobile USf orUS 32 billion4 to consolidate the market further and pose challenge to the leadersAT&T and Verizon.3Average Revenue Per User“Sprint agrees to pay about 32 billion tobuy T-Mobile: source,” 5 June 2014, �s proposed US 48.5 billion takeover deal for DIRECTV would merge thesecond-largest US mobile operator with the biggest US pay-TV provider, aimed ataccelerating the convergence between video distribution and high-speed wireless.Key M&A Deals Worldwide Since 2011Century Link acquired Qwestto consolidate fixed line assetsCentury Link acquired Savvis,a cloud and IT service providerLevel 3 Comm acquiredGlobal CrossingOrange sold completeholdings in SwitzerlandVodafone acquiredCWW for US 1.7 billionSold its 24.4% stakein Polkomtel (Poland)America Movil agreed to acquire21% stake in Telekom AustriaAT&T acquiredspectrum from QualcommHutchison 3G acquiredOrange AustriaVimpelcom acquired WindTelecom (and consequentlycontrolling stake in Orascom)Verizon Comm. acquired TerremarkSoftbank acquired majoritystake in Sprint for 22 billionVodafone sold 44%stake in SFR to VivendiVerizon acquired 45% stake fromVodafone in Verizon WirelessAmerica Movil acquiredCarso Global for US 22 billionOoredoo acquiredNMTC KuwaitKDDI, Sumito Corp acquiredJupiter TelecomAT&T acquired Leap WirelessSource: Capgemini TME Lab Analysis, Bloomberg, Company Press Releases5

It would enable AT&T to offer a full range of TV, mobile, phone and broadband servicesfor consumers to get content anytime, anywhere. AT&T’s proposed deal of DIRECTVfollowed Comcast’s US 45.2 billion agreement to buy Time Warner Cable that will forman even larger cable provider, underscoring the need for national scale.Currently, the US is leading the global trend of consolidating to a three/four operatormarket; in the country, four operators together control as much as 93% of the market.5Further, smaller fixed-line players in the US have merged to reduce cost and increasescale as wireless substitution over the years has accelerated their revenue decline.On the European side, large operators have been consolidating their positions acrossvarious regions and focusing primarily on markets in which they are the leaders – a trendillustrated by the numerous M&A deals taking place across Europe since 2011.Actually, there have been early signs of such a consolidation move in Europe alreadyseveral years ago. The inflection point came in 2007, when Orange sold its Dutch mobileoperation to another market incumbent Deutsche Telekom (T-Mobile), which consolidatedthe market in The Netherlands from four to three mobile network operators (MNOs).Later in 2009, Everything Everywhere (EE) was formed in UK with this necessity asOrange and Deutsche Telekom (T-Mobile UK) merged their respective UK ventures in thisnew entity. This deal resulted in four MNOs instead of five in the UK. These deals werefollowed by a number of other deals in Europe as operators began consolidating theirpositions within each European country. For instance, Vodafone sold its non-controllingstake in SFR to Vivendi in France and divested its 24% stake in Polkomtel in Poland.Similarly, Deutsche Telekom acquired the remaining 39% stake T-Mobile Czech.6 years after the iPhone launched, just 4big carriers are left standing,” 8 July 2013,Venturebeat; onsolidation5Key M&A Deals in Europe Since 2011Vodafone acquiredCWW for US 1.7 billionAmerica Movil acquired27.7% stake in KPNSold its 24.4% stake inPolkomtel (Poland)Vodafone acquiredKabel DeutschlandAcquired remaining39% stake T-Mobil CzechTelefonica acquires E-PlusAmerica Movil agreed toacquire 21% stake Telekom AustriaSold completeholdings in SwitzerlandAltice and Vivendiannounce merger ofNumericable with SFRHutchison 3Gacquired Orange AustriaVimpelcom acquired WindTelecom (and consequentlycontrolling stake in Orascom)Source: Capgemini TME Lab Analysis, Bloomberg, Company Press ReleasesNote: Includes completed, pending and proposed deals. This compilation does not include rumored or unclear deals6

TME the way we see itMarket fragmentation, customer concentration, and weak economic conditionshave always been present in some areas in Europe. However, M&A activity in thetelecom sector has traditionally been stifled by the regulatory burdens imposedby 28 national telecom regulators, 28 national competition regulators, and theEuropean Commission.Much like the US, thereare three dominantplayers in a countrywith comparable marketshares, with the fourthoperator often beingthe operator with aweak presence. Withfavorable regulation,more countries are likelyto have a three operatormarketEuropean telecom operators continue to discuss with regulators the merits ofgreater scale for profitable rollout of network upgrades and improved servicesthat will ultimately benefit the consumer. Hutchison’s 3G and Orange Austria’smerger deal got conditional clearance from the European Commission’s antitrustdepartment. This has led to an increased possibility of similar “four-to-three” mergersacross Europe.Much like the US, there are three dominant players in a country with comparablemarket shares, with the fourth operator often being the operator with a weakpresence. With favorable regulation, more countries are likely to have a threeoperator market. Already the markets of – Austria (A1, T-Mobile Austria, 3),Germany (Deutsche Telekom, Vodafone, E-Plus O26), Netherlands (KPN, VodafoneNL, T-Mobile), Switzerland (Swisscom, Sunrise, Orange), and Portugal (MEO,Vodafone, NOS) – have a three operator play. Other prominent markets includingDenmark, France, UK, Spain and Italy are likely to witness the “four-to-three”consolidation scenario.Larger telcos in Europe continue to acquire and consolidate their assets in Europe.Vodafone has stepped up its M&A activity, post its US 130 billion stake sale inVerizon Wireless. Vodafone acquired German cable operator Kabel Deutschland forUS 10.1 billion and followed it with US 10 billion acquisition of Ono in Spain that willstrengthen its fixed network holdings. For Vodafone, acquisitions of Ono and KabelDeutschland will enable them to offer mobile, fixed broadband and TV subscriptionsin a quad-play bundle.Majority of the larger deals in Europe are by telecom operators that aim to offercombined fixed, mobile and Internet services. Some of these deals have passedregulatory scrutiny, while some others are awaiting approval. For example, TelefónicaGermany’s acquisition of KPN owned E-Plus has been under European Commissionscrutiny, which anticipates lower competition in the German market post theacquisition. Also, Liberty Global’s planned US 9.6 billion acquisition of Dutchcable operator Ziggo has to pass EU’s merger laws as Ziggo is the largest cableoperator in the Netherlands, and Liberty already owns UPC, the second largestcable operator.On July 23, 2013, O2 and E-Plus announced theirplans for a merger of their operations in Germany.The combined entity would have the customerbase of 44 million subscribers and would be theoperation with highest market share. This deal isexpected to get EC’s approval.6“AT&T Scours Europe for Discount Deal Targets:Real M&A,” 16 July 2013, Bloomberg; ixed-line carriers with solid backbone networks attract operators that need toexpand their data transport capacity and enhance their enterprise offerings intheir core markets. This was the reason behind Vodafone’s acquisition of Cable &Wireless Worldwide or Deutsche Telekom’s purchase of GTS in Central Europe.Weighed down by profit-crippling price wars and regulations that threaten to furthererode margins, European operators also offer some of the world’s best takeovervalues.7 Latin American telecom operator America Movil entered Europe by acquiring27% stake in Dutch telecom operator KPN and also through a 21% stake in TelecomAustria. AT&T, which was long interested in acquisitions in Europe, is rumored to beinterested in buying Vodafone.7

Key M&A ChallengesRegulationIn a highly regulated sector like telecom, regulators have naturally a strong impact onlong term directions of the sector. Changing technologies, convergence, over-the-top(OTT) players, and emergence of the apps ecosystem create the risk that the role oftelecom operators be marginalized and that they be effectively converted to bit pipes.In addition, lower consumer spend has led to ever decreasing margin for operators. Inthat context, regulations and associated regulatory body play a key role in controllingthe M&A space.In Europe, multiple governments follow discriminatory approaches to spectrum thatfrequently benefit new entrants and does not incentivize network investments byincumbents. Lower investment costs for new entrants will result in them offeringartificially low prices thereby benefitting the end consumer. For instance, Telefónicaand 3 Ireland did not buy any 800MHz spectrum and instead bid for E-Plus inGermany and Telefónica’s O2 in Ireland respectively. Competition authorities haveraised concerns about both of these mergers. On the other hand, in the Netherlands,Tele 2’s acquisition of 800MHz spectrum allowed the operator to start a green-fieldmobile operation in the Netherlands to compete with KPN, Vodafone, and DeutscheTelekom —the latter not having acquired any 800MHz spectrum8.These country specific regulations and spectrum policies within the European Union(EU) have meant that the cost of an international call varies across countries.“The Phone Book and 14th Conference Guide”,17 March 2014, Citibank, accessed via Bloombergon 26 March 2014.8“774% difference in phone call prices acrossthe EU,” 6 August 2013; IP-13-767 en.htm9An illustration of varying cost of international mobile calls across ECost of aninternationalMobile Call(Cents/Minute)Source: European Commission ‘Digital Agenda’ press release dated 6 August 201398 GermanyT-MOBILEGermanyO2Eurostat Foodand Drink, IndexHungaryTELENOR

TME the way we see itThe Federal Communications Commission (FCC), the telecom sector regulatorin the US has often been criticized of regulatory overreach. In 2011, AT&T andT-Mobile USA had to withdraw their application to FCC for their proposed merger.FCC had rejected the proposed merger citing reduction of choice for customersand competition in the market, and had even referred the merger application to theCommission’s Administrative Law Judge.The EuropeanCommission (EC) ispushing for a singlemarket for telecom withinEU. A single Europeanmarket offers more than600 million customerswith the largest GDP ofany economy. This scaleof customer base willprompt leading operatorsto invest in networksand new serviceswith comparable costadvantages.However, the FCC has played a strong role in making the US a vibrant andcompetitive Telecom, Media and Entertainment market. For example, the FCCapproved in 2010 the conditional merger of Comcast and NBC Universal, which wasthought to allow concentration of too much power over both television content andits transmission to consumers. The FCC had employed several merger conditions,such as requiring Comcast to offer a stand-alone broadband service for less thanUS 50 per month for three years, in order to achieve certain policy goals – e.g. byputting an upper limit, FCC was attempting to ensure that customers are not forcedto subscribe to unwanted video and phone plans. The FCC in this case was drawingfrom its learning from the approvals of a couple of mergers in 2005. In approvingthe mergers of SBC-AT&T and Verizon-MCI, FCC had mandated that these carrierssell a stand-alone DSL service for two years. Apparently, the companies had pricedtheir standalone DSL services so high that customers were forced to subscribe tobundle offers.Similarly, in Europe the negatives of over-regulation notwithstanding, the EuropeanCommission (EC) is pushing for a single market for telecom within EU. A singleEuropean market offers more than 600 million customers with the largest GDP ofany economy. This scale of customer base will prompt leading operators to investin networks and new services with comparable cost advantages. It would alsoallow operators the freedom to provide services, so that any operator can effectivelyoffer any customer the same high quality services, wherever in the EU. In additionconsumers can have the freedom to consume digital services wherever theyoriginate within a unified European telecoms space.10More recently, the EC has cleared the takeover of O2 Ireland by 3’s parent companyHutchison Whampoa. Of course, the clearance is subject to a number of conditions,paving the way for the creation of the second biggest telecoms provider in Ireland.The merger will bring the number of Telco incumbents in Ireland from four to three(Vodafone, Meteor and O2 3). The combined entity will have about 40% of themarket share.11The O2-3 deal is test-case of sorts for the European telecoms sector. This dealwill pave way for similar consolidation in other European markets. For example, on23 July 2013, O2 and KPN’s German subsidiary E-Plus had announced their plansfor a merger of their operations in Germany. The combined entity would have thecustomer base of 44 million subscribers and would be the operation with highestmarket share.“One single telecom market for Europe!,“8 October 2013, European CommissionPress Release; SPEECH-13-787 en.htm10“Comreg raises concerns about O2takeover by Hutchison Whampa,”28 May2014, The Irish Times, ver-byhutchison-whampa-1.181239411IT infrastructure consolidationM&A deals bring significant IT challenges for telecom operators, as it can be difficultto integrate back-end, customer-facing, and operational and business supportsystems, throughout merged organizations. For example, in the US, Sprint’s US 35billion acquisition of Nextel in 2005, involved operators who had implementeddifferent technologies that could not be integrated. As a result, there were issues9

regarding call quality, interoperability and customer service which led to massivecustomer churn and a write-off of nearly US 30 billion in value.While scaling up through M&A remains an important strategic goal for CSPs, it isalso imperative for them to assess the various challenges of integrating IT systemsand processes – the operational and business support systems, front-end systems –so as to offer a uniform experience to their existing and acquired customers.As the number and complexity of standard telecom applications such as billingsupport systems or customer relationship management has grown, so have thechallenges of ensuring seamless integration of two companies. Several olderoperators are still running highly complex, custom-built, or legacy applications,which they struggle to keep up-to-date in an ever changing business environment.Such operators not only have to bear the obvious personnel and upkeep costsof older technology, they also have to bear the loss of loyal customers to newer,nimbler incumbents.Combination of two different entities always presents overwhelming challengesthat needs more than a just a few technology fixes. These challenges are morepronounced when two telecom operators of different pedigree decide to merge.For example when an operator with a predominant customer base of pre-paidcustomers merges into a larger, more complex, diversified operator an entirelynew set of challenges comes up. Operators with a predominant prepaid baseneither have an IT-based billing system or a CRM system. At best, they may haveimplemented a rudimentary CRM system. Their IT function is only designed toprovide the most basic services. On the other hand, the larger operator has highlycomplex and customized billing and customer-care systems.Several older operators arestill running highly complex,custom-built, or legacyapplications, which theystruggle to keep up-todate in an ever changingbusiness environment. Suchoperators not only have tobear the obvious personneland upkeep costs of oldertechnology, they also haveto bear the loss of loyalcustomers to newer, nimblerincumbents.Further, technological changes such as convergence of fixed and mobile networks,increased deployment of femtocells, mobile data offloading to WiFi, packet-switchedto all-IP networks pose a challenge for legacy IT systems across all businessfunctions. Their implementation either requires completely new IT systems, orrequires massive modifications to existing IT infrastructure.So, telecom operators should use their discretion in seeking business andtechnology expertise. In absence of which, the combined entity could end upwith creaking technology, siloed departments, sub-optimal services rather than acoherent, end-to-end offering.10 Tele

ecomTME the way we see itConclusionAs the US are entering into a likely final phase of consolidation, Europe is engaginginto a series of M&As which will be a major characteristic of the communicationsmarket for the next 10 years.While Europe took the lead in third-generation wireless networks several yearsago, moving from 3G to faster 4G long-term evolution technology has taken muchlonger than it has in the US. The lag has been due to a weaker European economy,an inconsistent spectrum licensing policy by various regulators and operators highpricing on roaming costs and data that discourages use. In that context, industryconsolidation will be helping the telecom operators improve scale, reduce costs andthus run networks profitably. This will enable telecom operators to optimize theircapex in 4G networks, make better use of allocated spectrum and invest in nextgeneration technologies such as 5G.Similarly, the regulatory environment of telecom sector across the world is improvingas regulators realize that financial strength of telecom sector is important foreconomic growth, and a more pragmatic view on consolidation is necessary.As a consequence, the opportunity to buy technology and talented resources atreasonable prices will definitely drive some further cross-border acquisitions inEurope. In addition, impending European Commission regulations regarding telecomM&A, spectrum policies and infrastructure sharing will reshape the region’s industrylandscape, with fewer but stronger CSPs.Authors:Sayyam KulkarniSenior Consultant,Capgemini TME LabsManish SharmaSenior Consultant,Capgemini TME LabsPierre BlanchardVP, Global TelecomsPractice11

TME the way we see itFor more details contact:Erwan Le DuffGlobal Telecoms Practice Lead,[email protected] BlanchardVP, Global Telecoms out CapgeminiWith more than 130,000 people in over 40 countries, Capgemini is one of the world’s foremost providersof consulting, technology and outsourcing services. The Group reported 2013 global revenues of EUR10.1 billion.Together with its clients, Capgemini creates and delivers business and technology solutions that fit theirneeds and drive the results they want. A deeply multicultural organization, Capgemini has developedits own way of working, the Collaborative Business ExperienceTM, and draws on Rightshore , itsworldwide delivery model.With a network of 8,000 specialized experts, a dedicated research lab, and Centers of Excellencein the US, EMEA and India, Capgemini’s Telecom, Media & Entertainment practice enables clientsto transform and deliver through tailored technology solutions. Our global delivery capabilities andindustry-specific service offerings serve more than 600 clients worldwide, including fixed, mobile,Internet Service Provider, cable, broadcast, publishing, & entertainment organizations.For more information please tThe information contained in this document is proprietary. 2014 Capgemini. All rights reserved.Rightshore is a trademark belonging to Capgemini.

acquiring fixed line or cable operators that would enable them to offer quad-play services, whose uptake has been increasing in Europe. The quad-play offering would enable the operators to lower the churn and thus, reduce customer acquisition costs in a saturated mobile marke