Telco asset transactions – what to consider ahead of an asset sale?

The past year has seen a rapid transformation of vertically integrated telecommunications operators into separate service providers (ServCos) and infrastructure operators (InfraCos), as a result of asset mergers and acquisitions (M&A) activity.

According to Bain & Company’s 2022 Global M&A Report^[1], the average value of telecommunications M&A deals increased by 48 per cent from 2021. Over 60 per cent of transactions were either in-country consolidations or infrastructure deals. This has had the impact of increasing deal value, with private investments rising 100 per cent. Infrastructure M&A, in particular, is rapidly increasing, as assets are offering resilience and revenue growth potential, helping to reshape the industry.

This is not a new idea. It has been building for some years and accelerated during the pandemic.

What is new is the breadth of investors and the pace of deals. In the past twelve months we have seen publicly announced or completed deals in Australia and New Zealand with Optus, Telstra TowerCo (Amplitel), Vodafone NZ, TPG, Spark NZ and Telstra InfraCo. In Asia, we have seen many tower transactions in Indonesia, also in the Philippines and more. As the telco market in Asia continues to consolidate assets, driven by high capex requirements for 5G and intense competition, further infrastructure transactions may emerge.

Investors and sellers are well educated in what is appropriate from a process and pricing perspective, as are the various advisors.

Successful transformation requires a shift in mindset

However, one area that is often overlooked is the mindset change that needs to occur as organisations transition from vertically integrated telecommunications companies to standalone infrastructure companies.

This is something partially new in that previous infrastructure deals have typically involved a new owner/operator with broadly new staff rather than a telecommunications operator separating into a ServCo and InfraCo and populated with existing telco staff. So, previously, the new InfraCo didn’t need to change its mindset – just create one.

While the assets and their telecommunications signals do not change physically during an infrastructure sale, the commercial construct, relationships, contracts and priorities do change, as shown in Figure 1. This has some practical outcomes, from thinking shorter term to longer term, from a higher risk tolerance in some areas to a lower risk tolerance in others, and a greater need for certainty around asset quality and investment profile.

Figure 1: There are significant commercial and relationship differences between vertically-integrated telcos and infraCos.

The commercial construct, relationships, contracts and therefore priorities change after an asset sale, and there needs to be a shift of mindset. Attitudes and behaviours related to the infrastructure need to change from keeping the assets running and the network on, to investing for the longer term to maximise dividends, and provide consistency for shareholders and customers. This is driven by a shift in customer base from a large group of businesses and consumers to a small number of telcos and wireless operators.

Stakeholders and customers are also now not just looking for consistency, but, increasingly, resilience. Reliability of the assets leads to predictability in returns. Being able to demonstrate that climate change and resilience planning has been embedded into the operation and maintenance of the assets, will provide greater certainty of reliability, consistency and therefore returns.

What needs to be considered ahead of an asset sale?

If you are facing an upcoming sale, or if you have just completed one, what do you need to consider and do?

1. Long-term capital expenditure

You will need to gain a firm view on your long-term capital expenditure, both growth and sustaining capital. What is your asset lifecycle replacement strategy and cost estimate? Do you have a robust 30-year capital expenditure forecast? How can you optimise this forecast to build value over time for your shareholders?

2. Operating versus maintenance costs

You will need to identify and separate the operating and maintenance costs for the assets being sold. This is a complex task, as, depending on the asset boundary, such costs may be accrued via service agreements that span multiple asset types, some of which will not be in the transaction scope.

3. Asset management

Asset management will be at the core of your business. You should start to understand and define your asset management principles, what is important and what can be disregarded. Soon the board will be more interested in assets and how they are managed, because assets are now core business.

If not already in place, developing a roadmap for asset management maturity as a separated business will give confidence to potential investors. Effective asset management with a long-term horizon will influence which decisions you make today, as opposed to what you may decide with a shorter-term horizon.

4. Relationship management

You will need to understand that your key relationships will move from an internal relationship with your primary customer, that is, your internal colleagues, to an arms-length relationship with your primary customer, in a separate business. This will require service level agreement terms with which you will need to comply. This will change your relationships and how you plan and invest. It is important to consider these changes in advance of the transaction if possible.

5. Investor management

Potential investors will ask for your projected future cashflow forecasts and what sensitivity scenarios should be applied to help them understand the risk of these varying. Collecting this information ahead of transactions will make the transactions more straightforward.