ECONOMY

Stirrings of M&A activity in telecoms

The pick up in corporate activity, namely mergers and acquisitions (M&A), is one of the highlights of 2006 so far, reaching its peak with the recent acquisition of a majority stake in Emporiki by France’s Credit Agricole (CASA). The banking sector has undoubtedly dominated M&A news for a good reason, including its importance to the economy and the capital markets and the spate of small and large M&A deals it has produced. Although corporate action in the banking sector will continue to take place in the next few months, telecoms may steal the show, starting with a large M&A deal in the sector in the next few months or so. The government has so far raised more than 1.7 billion euros, exceeding its yearly target of some 1.65 billion, from the sale of state assets. But, it is not just the state sector which has boosted corporate activity. National Bank of Greece raised 3 billion euros to acquire control of Turkish Finansbank and has submitted a bid for a Serbian and a Romanian Bank (CEC) to expand its franchise abroad. Also, EFG Eurobank has bought small banks in Turkey and Ukraine and is building an extended branch network in Poland. Alpha Bank and Piraeus Bank also eye small banks in the broader geographical region. An Arab investment fund from Dubai bought 35 percent of Marfin Financial Group, which seeks to merge Marfin Bank with Egnatia Bank and the Greek subsidiary of Cypriot Popular Bank. However, developments are not restricted to the banking sector. BC Partners, a private equity group, bought a majority stake in listed Greece’s Hyatt Regency Hotel and Casino firm via a 100-percent-owned vehicle. Deals at a smaller scale have been done in various sectors. A company controlled by Global Finance has made a public offer for listed firm Nikas, whereas Folli Follie, which bought an additional 25 percent stake in Duty Free Shops (KAE) from Germanos and Mytilineos, has made a public offer for a 100 percent of listed Delta Project, specializing in alternative energy sources. But the agreement of Cosmote, OTE’s mobile telephony arm, with the major shareholder of listed company Germanos, the country’s largest mobile telephony retailer, to buy its stake and the subsequent public offer stands out as the biggest corporate M&A accord outside the banking sector so far this year. The agreement of Intracom Holding to sell a majority stake in its telecoms equipment manufacturer Intracom Telecoms subsidiary to a subsidiary of Russian Group Sistema also made an impression. However, the telecommunications sectors has so far been left out of the big picture. The agreement of two alternate communications carriers, Lannet and Telepassport, to unite forces is not considered a big one. Cosmote’s deal with Germanos, however, is a big deal but it is not considered a pure telecoms agreement. Still, the telecoms sector has the potential to produce the biggest transformational corporate deals in the next 6 to 12 months. Although everybody expects to see the first bid deal coming from the OTE Group with OTE buying out Cosmote’s minorities, we think mobile operator TIM Hellas is the most likely candidate. The private equity groups, Texas Pacific Group (TPG) and Apax Partners, which own 100 percent of TIM Hellas and Q-Telecoms, the country’s third and fourth largest mobile operators, are known to have hired two major investment banks, reportedly Morgan Stanley and Lehman Brothers, to advise them on the sale of their holdings. The two Greek mobile operators were bought by vehicles owned by the two private equity groups in a leverage buyout deal, exceeding 2 billion euros in 2005. Investment bankers consider it a very smart move on the part of TPG and Apax and expect to pay them handsomely. The point out that EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) multiples at which similar deals have been done have gone up since then. The fact that TIM has boosted its revenues and expanded its EBITDA profit margin despite suffering losses due to the servicing of the increased debt burden in the first half is thought to have added to its appeal. Moreover, the high price paid by a consortium of Arab companies to buy the third mobile license in Egypt has also boosted expectations that the two private equity groups can make a killing by selling their Greek assets at a good price. But the sale of TIM Hellas and Q-Telecom to a third party is definitely going to stir things up in the telecoms sector. Of course, the duo could be sold to another financial investor, who could then wait for a while and sell it again at the proper price to make money. Even so, the new financial investor may be more willing to take advantage of potential synergies with other telecoms companies at a time the convergence of fixed, mobile and internet is under way. Competitor for OTE However, the chances are TIM Hellas will be sold to a telecoms operator from abroad. In this likely scenario, it would have been a surprise if the new owner did not look into creating the country’s second largest telecoms operator, offering a wide range of services, after OTE. Fixed line operator Tellas, which is owned by the Public Power Corporation (PPC) and Italian Wind, which in turn belongs to the empire of Egyptian entrepreneur Naguib Sawiris, could team up with TIM and Q-Telecom if the Egyptian, who has expressed interest in TIM Hellas in the past, ended up getting the prize. Even if it were another foreign telecoms operator, analysts and investment bankers believe it would be difficult to overlook the possibility of teaming up with another Greek telecoms operator at a time broadband service in Greece is still at its infancy to grab a large market share. FORTHnet, controlled by Icelandic private fund Novator, could play that role. All-in-all, there is good reason to believe the likely sale of TIM Hellas – Q-Telecom to an interested company in the next few months will turn out to be a transformational deal, speeding up even expected developments, such as OTE’s buyout of Cosmote minorities, in the next 12 months or so. This may also put more pressure on the government to find a strategic investor for OTE but we would consider this unlikely before the next general elections. So, the time may have arrived for telecoms to take their blood back in the M&A field.