Service Providers Primp for Acquisition Attention

Cable operator Charter Communications passed on a reported option to buy wireless provider Sprint, but there are plenty of other providers in the mergers and acquisition market. And those looking to merge or be acquired can take a few steps to make them even more attractive to potential suitors.

After all, the communications and Internet M&A arena continues to sizzle.

"Deal activity in 2017 continues to outpace 2016 as market participants look to secure their footing in the digital value chain and position themselves in anticipation of regulatory changes," wrote Bart Spiegel, partner, Media and Communications Deals, at PwC in the firm's 2Q 2017 Insights report.

Although second-quarter 2017 M&A activity slowed when compared with the first quarter of 2017, momentum was still much higher than the past two years, PwC Consulting found. In the most recent quarter, telecommunications, Internet service providers, cable operators and other industry businesses participated in 232 deals worth $18.8 billion, the consulting firm determined.

		Is fiber a good investment for venture capitalists and private equity firms?   Yes, fiber lasts practically forever   No, better off putting money in startups and unicorns   Maybe, but only on a careful, case-by-case basis

Territory is, of course, a critical factor in a buyer's decision to purchase another provider. Whether they want to extend their geographic reach or densify an existing area of coverage, acquirers rank regional territories and subscriber bases high in their criteria. With its purchase of MetroCast Cablevision , Atlantic Broadband extended its East Coast reach from Maine to Florida, said Richard Shea, president and CEO of ABB. For its part, Cincinnati Bell Inc. (NYSE: CBB) gained access to far-flung Hawaii, with its purchase of eponymous telecom provider Hawaiian Telcom Communications Inc. (See Acquisition Alert: ABB Buys MetroCast, Cincinnati Bell Acquires Hawaiian Telecom, OnX.)

But being geographically desirable is far from the sole qualification.

What a buyer wants
Fiber and next-generation network access solutions are some of the most valuable assets a prospect includes in its portfolio. Granted almost immediate access to fiber, an acquirer can more quickly offer its services to a new base of customers. In some cases, seeing how smaller, more agile operators have implemented next-generation technologies can guide the acquiring companies' deployment plans.

When it unveiled a $2.36 billion merger deal with RCN Telecom Services LLC and Grande Communications Networks in May, Wave Broadband expanded its ability to expand its fiber footprint; this builds on two 2016 acquisitions and one loan, designed to allow Wave to add 100 miles each month to its network (5,500 miles in September 2016).

Fiber details must be right, though, cautioned Brett Lindsey, Everstream CEO in an interview. Should a provider not own the fiber and the network is at capacity, then this is not a good acquisition target, he said. (See Everstream CEO: The One With the Most Fiber Wins.)

"If, for example, we saw a company that on the surface looked great -- just throwing out random numbers-- they're a small potential bolt-on with $10 million potential in revenue and they're doing $3 million EBIDA, well that sounds great," he said.

"But if we go look at it and it's all fiber they've hired from another provider and it's only four strands and they've got customers on all of it already, we know what that means in limiting opportunity to sell high-bandwidth solutions to people and we would pass immediately," Lindsey added. "If somebody doesn't have dense fiber routes across the network then we immediately would not look at it."

Typically, fiber alone won't win subscribers' hearts. Checkbook-toting operators also want prospects to have current technologies in place or, at least, on their roadmap. After all, these deals occur simultaneous to providers' growing investments in software-defined, standards-based ultra-broadband technologies such as XGS-PON, NG-PON2, DOCSIS 3.1 and Gfast -- timing that both helps and challenges operators' expansion plans.

Those providers whose upgrade journeys are well underway are more easily integrated into an acquisition or merger partner. After all, they're decreased reliance on proprietary standalone architectures; cleaned up data and eliminated silos, and embraced standards that more easily support integration with other operators' systems.

"There are a lot of small guys out there spending a lot of money building out fiber-to-the-home infrastructures. Many of them are taking that green field opportunity to embark, Day One, on a one-network strategy. And I think when it comes to acquisition time that will stand them in good stead," Ronan Kelly, CTO EMEA and APAC Regions at ADTRAN, told UBB2020.

"The larger operators… will not only see the infrastructure as an opportunity, but they'll see the implementation approach of what they hope to do in the future already achieved in those operators," he continued. "We've already seen this. If we look at many of the acquisitions that have gone on in the industry -- whether in the vendor side or the operator side over the last few years -- we tend to see a series of acquisitions for scale reasons but we also see it for capability reasons, for technology reasons."

MetroCast was attractive to ABB, in part, because the provider already had begun transitioning to DOCSIS 3.1 and was already internally connected over a fiber backbone, Shea said in an online discussion of the deal. "[Therefore] we are well-positioned for a smooth transition to 1-gig Internet in the relatively near future," he added.

These transitions extend beyond the optical layer into a converged one-network strategy that includes software-defined networking, network functions virtualization, cloud and analytics, added ADTRAN's Kelly.

The frenzied industry M&A activity can make it tougher for smaller providers to buy their preferred targets, Everstream's Lindsey admitted. Premiums can be higher due to competition, he said. Sometimes Everstream looks at operators or ISPs that might need a bit more work or are too small to attract the attention of tier one providers, said Lindsey.

"It definitely drives up the cost of those acquisitions, especially if you're trying to do a larger deal. The fact you have so many more buyers than you've had before makes it difficult even for a private equity company to get involved in a deal," he said. "A lot of the deals that normally people would be going and raising additional capital to grow their business, when you have a frothy market people are saying, 'I'm getting offers to take me out and they're giving me a little bit of a look-forward price versus me going down the normal path of taking some additional equity.' "

Related posts:

• Orange to Expand Analytics, Digital Transformation Services
• Fiber Companies Grab M&A Spotlight
• The Death of a Small ISP

— Alison Diana, Editor, UBB2020. Follow us on Twitter @UBB2020 or @alisoncdiana.