M&A activity will drive future telecom investment in the MENA region (page 3 of 3)

At first look, many M&A deals in the region seem to have been commanding unjustified premiums. However, to better assess these deals, it is important to understand the ambitions of the operators dominating the M&A scene.

Capturing Value Through Synergies

Operators prefer to enter markets that exhibit a high level of integration with their existing footprint. Synergies could also be achieved when realizing scale economies by integrating operations under a shared services model.

Clear Financing Plans

Telecom operators in the MENA region are generally cash rich. In fact, many operators still rely on their excess cash to finance acquisitions. Others have effectively resorted to bank debt and low-interest shareholder loans. Going forward, acquirers will have to tap into even more financial resources, such as high-yield bonds and equity financing.

Following a Disciplined Due-Diligence Approach

A robust due diligence process is a must for any M&A activity. Investing upfront in due diligence helps mitigate post-transaction risks. Notwithstanding the importance of a systematic approach, speed is of the essence given the highly competitive M&A landscape.

Post-Transaction Planning and Management

The first challenge operators face after a transaction is managing the acquired operation. The key to success is to have a robust integration plan that is timely and does not disrupt ongoing operations.

The Way Forward

A number of factors indicate that the momentum of expansion activities in the Middle East telecom landscape will continue through mergers and acquisitions.

Economic and Regulatory Environment

• Increasing liquidity in the market will attract new breeds of investors to the regional telecom landscape.
• Private equity players are not yet active in the regional telecom market, but they are bound to enter as more operators start exhibiting financial difficulties and require performance turnaround.
• Many telecom operators in the region are cash rich, and the level of debt on their balance sheets continues to be relatively low.
• Many operators have not yet felt the urgency for international expansion.
Regional Competitive Pressure
• The increasing economies of scale of regional players will pressure late players to expand so they can compete effectively.
• As regional players expand their footprint in related markets, they can leverage revenue synergies from the resulting "corridor effect," leaving local players at a competitive disadvantage.
• As a result of their expansion, many operators will experience cross-ownership and multimarket-facing, helping them become more collaborative at the expense of local players and rivals.
Local Competitive Performance
• Markets with high levels of competition (more than four players) will exert increasing pressure on operators to deliver satisfactory financial results, prompting consolidation at the local level.
• Some players starting greenfield operations for the first time may not do so effectively and will become attractive acquisition targets.

In conclusion, the MENA telecom M&A scene is set to continue thriving amid a positive economic outlook and an increased level of market liberalization. As greenfield investments continue to diminish, a wave of consolidation will emerge. In the upcoming phase, operators should focus on realizing cross-border synergies in the shortest possible timeframe or else risk collapse or takeover. Operators can realize synergies through early planning and by following a highly disciplined investment execution approach that includes mastering critical activities, such as pre-deal due diligence and post-transaction integration.