The telecoms and media market is in a state of flux with convergence and consolidation reshaping the industry. Convergence comes as internet and voice traffic use the same channels, and the need to seamlessly transfer this data across networks in the most efficient way. Many wireless operators are discovering fibre in the ground is needed for this, while fibre operators are discovering the need for content to drive take up of data packages.
Consolidation comes from the need to reverse European Union (EU) policy that has created a fragmented European telecoms market. This landscape has left individual players with insufficient scale to invest in the new high speed data networks required for the latest generation of smartphones and their users. In media, the need for scale in international distribution has also driven a natural need for further geographical diversification.
The synergies generated in consolidation deals so far this year are typically positive for both shareholders and bondholders. Examples include Comcast’s $45bn purchase of Time Warner Cable, Liberty Global’s $14bn purchase of Ziggo and AT&T’s $67.1bn takeover of DirecTV.
Sometimes, anaggressively structured deal can offer bondholders mixed fortunes. Early in 2013, the bonds of Virgin Media fell sharply after Liberty Global announced it was purchasing the UK cable company. In this instance, holders of Virgin Media debt were adversely impacted as the combined entity had substantially higher leverage and the bonds were downgraded from investment grade to high yield status.
Conversely, new debt funding for merger and acquisition (M&A) activity has offered attractive entry points for strong credits with a clear deleveraging profile. Verizon’s record $49bn bond issuance in Q3 2013, to fund the $130bn purchase of Vodafone’s 45% stake in Verizon Wireless, is such an example.
Recent M&A activity has generally been driven by corporates, with most deals to date having clear economic logic that drives achievable synergies. Funding usually comes from a mix of high cash balances and cheap debt, often with an element of equity issuance to maintain a reasonable capital structure for the new entity.
In contrast to recent history, private equity are the clear M&A outsiders so far in this cycle. They have been unable to transact despite the low cost of credit to fund deals, given the high valuations of the firms under consideration and the struggle to achieve the same mutual benefits that the newly combined entities see in terms of lowering margins. That said, many private equity funds are cash rich and looking to deploy funds. Could a bout of aggressive behaviour from these funds stoke the M&A fire?
As a result of this shifting backdrop in the sector it is important to be mindful that not all consolidation is beneficial. Adequate fundamental research is required into the companies’ expected structures following the merger. However, opportunities do exist, and we are monitoring them with interest.
Article by Stephen Thariyan, Global Head of Credit, Henderson Global Investors
These are fund manager views at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser
Stephen Thariyan joined Henderson in 2007 as Head of Credit, from Rogge Global Partners where he was a Portfolio Manager of Global Credit and its Absolute Return fund. Stephen started his career in 1988 at Ernst & Young as a Trainee Accountant and then moved to Chevron Corporation as a Senior Auditor. He moved to Gulf Oil in 1994 as a Business and Economic Adviser and then to NatWest Markets as a Director and Senior Credit Analyst. Stephen graduated from the University of Newcastle-Upon-Tyne with a BA (Hons) in Accountancy and Financial Analysis.