Jonathan Rowan has worked in technology, media and telecoms (TMT) since the 1990s. Prior to joining BDO, he spent 20 years as a consultant in the Strategy and Commercial Due Diligence (CDD) space, working globally with a variety of firms. Jonathan works with both PE-backed and large corporations, and his specialisms include corporate strategy, transaction support, organic and inorganic growth strategy, new market entry, and the commercialisation of new technologies.
We asked Jonathan about the current telecoms infrastructure and fibre environment and the trends he’s seeing…
How have the telecoms infrastructure and fibre sectors changed over the last two years?
It’s certainly been an interesting time, and I think we can group recent developments into what can conveniently be considered as the five Cs:
- COVID. Understandably, this has been the dominant feature in the telecoms and technology landscape. Throughout the pandemic, the sector has delivered the technology and connectivity people rely on for home and remote working. We’ve seen acceleration in the adoption of digital ways of working, whether that's remote collaboration, remote supply chains, customer interactions, employee communications, or eCommerce. And all of that is driven by the capabilities that telecoms infrastructure and fibre deliver.
- Connectivity. Supporting the need for improved connectivity has been the ongoing roll-out of Fibre to the Home (FTTH) and 5G. There’s considerable investment going on in both full fibre infrastructure and 5G, and the pace of investment and deployment has really accelerated over the last two years. 4G versus 3G was basically only a speed improvement, whereas 5G is a game changer.
- Cloud. Migration to the cloud has also significantly accelerated. Businesses are finally recognising the resilience and scalability that the cloud provides. The security concerns that caused many companies to delay their investment in cloud technology have proven unfounded . Some telcos are delivering their own cloud services and others are partnering. But, however the services are delivered , cloud services require very high-quality connectivity, which is something that only telecommunications service providers can deliver.
- Convergence. Convergence has been talked about for years, but we’re finally seeing significant and accelerated implementation across sectors as larger organisations in particular seek to compete with smaller, digitally native and more agile players and startups. Similarly, digital transformation and associated investments are accelerating across the board as the benefits of convergence become ever clearer and the risks of being left behind become ever greater.
- Consolidation. We’re seeing very high deal volumes across the TMT landscape telco and some eye-watering bids being made. For example, KKR has recently bid about EUR10.5bn for Telecom Italia, which represents an enterprise value of just over EUR35bn when you take debt into account! So, clearly, scale is no longer a protection against deal activity. We’re seeing a similar pattern with high valuation multiples across the board, from large telcos to small, localised and specialist technology firms. The space is very busy with deal activity with private equity, venture capital and infrastructure funds all looking to invest whether through acquisitions, bolt ons, carve outs or minority holdings.
Has the role of Managed Services in the TMT space changed over the last two years?
The importance of both IT and telecoms managed services has increased, as has their integration into seamless end-to-end suites of connectivity-dependent IT services. Virtually all telecoms managed services now have some element of cloud-based solution included, whether it’s an enterprise software solution, unified comms or some other messaging, conferencing or collaboration tools.
To give you an idea of how hot the sector is right now, global telecoms equipment manufacturer Ericsson recently announced a $6.2bn acquisition of Vonage, a provider of cloud-based communications solutions and one of the ealy pioneers of Voice over IP (VoIP). The price is more than 70% above Vonage’s market value just two months before the deal was rumoured, and is at approximately a 30x EBITDA multiple. This bold deal is Ericsson’s largest ever acquisition and highlights the expected future value of cloud-based enterprise solutions and managed services. The acquisition is expected to close in the first half of 2022.
What were some of the big challenges faced by the telecoms infrastructure and fibre sector during the pandemic?
As a critical enabler of remote working, eCommerce and B2B connectivity, the telecoms infrastructure sector was among the most resilient during the pandemic. There was no reduction in demand, but rather a change in demand patterns – lots of small pipes going into houses, rather than big data pipes going into office blocks.
Although engineers were permitted to deal with faults and vital maintenance during lockdown, for many operators, non-vital build work slowed down . This led to delays in roll-out plans, and those delays have considerable costs attached. Telecoms operators are working hard to catch up on the backlog now, but there are constraints around availability of qualified construction personnel and experienced field engineers.
What were some of the solutions to these challenges?
With respect to construction capacity, locking in capacity with third-party supply agreements has proven key. Where these contracts are not in place, telcos will need to work with external contractors and third parties to get their roadmaps back on track.
What are the trends driving investment growth?
The most important trends driving investment growth in the telecoms infrastructure sector are:
High demand for Fibre and 5G – the unrelenting demand for ubiquitous, high-quality, high-capacity and always-on connectivity is here to stay. That means full fibre connectivity in a fixed environment and 5G in the mobile arena. These two technologies are complementary in many ways:
- In a fixed environment you will never beat fibre for the resilience of connectivity and the ability to have true, high-quality, high-capacity, always-on broadband.
- In a mobile environment to deliver the kind of speeds that 5G is capable of, you need fibre to the mast, which is a new requirement. And once consumers and businesses are used to the kind of speeds that full fibre can deliver, 5G will need to have a comparable service in a mobile environment.
- In a Fixed Mobile environment where cost or complexity means full fibre connectivity into the property is not viable, 5G Fixed Wireless Access (FWA) is an option.
Growing demand for Cloud and enterprise solutions – the pandemic has accelerated growth of cloud migration, but there is still massive scope for growth, particularly with many companies still under-invested in cloud. Large enterprises need to play catch up and that will increase demand for connectivity to support cloud solutions. I see an inverse correlation between the size of an organisation and how much of their IT stack they’ve already migrated to the cloud. So the biggest companies tend to still have significant amounts of migration to do and this will drive continued growth in demand.
Rapid growth of The Internet of Things (IoT) – with the boost in availability of 5G services, the potential of IoT (and more specifically Industrial IoT or IIoT) is increasing significantly. In a recent survey by Omdia, over 70% of companies interviewed said they expected IoT technology to become more important to their business over the next 18 months, and roughly half said the pandemic has accelerated their IoT plans. Businesses of all sizes have dabbled in IoT, but now they are really starting to embrace what it can do. Over the next 18-24 months we will see significant investment and, coupled with 5G, some very sophisticated solutions and new business models.
Increasing penetration of embedded SIMs (eSIMs) – replacing the conventional SIM card, the eSIM is hardware baked into the device at point of manufacture so the configuration by the mobile operator or MVNO is completed entirely ‘over the air’ and operators don’t need to physically ship a SIM card to the customer. Around since 2016, the technology is now getting to a point where there are enough eSIMs as an installed base in the market to have a meaningful impact. Some of the forecasts I’ve seen say more than 10% of the installed base of devices will be eSIM-enabled by the end of 2021. eSIMs will streamline operations for mobile operators and have a significant impact on IoT as well as enabling new business models.
What are some of the key considerations for telecom infrastructure and fibre businesses moving forward?
I would suggest businesses should focus on three key areas:
- Making strategic choices around M&A: Telecom infrastructure and fibre businesses of all sizes need to think about how they want to play in the market around the ‘consolidate or be consolidated’ question. For many businesses a natural starting point might be, "I want to consolidate other businesses and grow inorganically ." But actually, it could be a sound strategic choice to say, "I want to be consolidated." And remember there is no protection against unsolicited bids, as we have seen with the KKR bid for Telecom Italia.
- Accelerating digital transformation: To remain competitive, it’s critical to get digital transformation right. Whether your strategy is to be a consolidator or to be consolidated is irrelevant; everyone needs to be prepared. In particular, many telcos still have complex, unwieldy IT stacks which makes consolidation much more difficult . I would encourage them to accelerate their digital transformation initiatives to get a stronger, cleaner IT stack. This will show you can integrate new acquisitions, as well as launching and upgrading new services quickly.
- Keeping a close eye on the competition: The competitive landscape is continually evolving at pace, and you need to know who your competitors are today and in the next 3-5 years. So, for example, is Amazon a telco? Is it an IT Services company? Is it both? How about Facebook? The answer is: a resounding yes to all those questions. They're doing many of the things that telcos and IT services companies do. And in most cases they're doing it faster and better. They’re also investing more. You might have exclusivity against other telcos and IT services businesses, but someone you might not currently think of as a competitor could come out of left field and surprise you . Think about Skype and Whatsapp, when those services launched they presented a significant and material threat to large telecoms operators as well as to many smaller niche players. There’s always a threat of obsolescence in technology-based services. For smaller telcos and IT services players, it’s a case of: “How do I create a defensible position in my market and exploit my strengths?”
What advice do you have for investing in Managed Services in the telecoms and IT space?
For investors, I would say one of the key considerations is the customer base. Good questions to ask are:
- Is the customer base differentiated in any way?
- Are services focused on a specific industry sector or a new market?
- Can you define (and articulate) who the customers are or is it a very bland service offering?
- Churn is another key consideration. How loyal are the current customers and what’s driving that loyalty? Is it sustainable?
- How many customers take more than one service?
Similarly I would advise looking at the competitive landscape and associated risks. Does the business really understand the market it is operating in today and how that market is likely to evolve in the future?
I would always consider the management team. How stable and experienced is the management team and what is their track record? How long have they worked together?
It’s also worth digging under the surface of reported margins for the business – what are the key drivers of margins and how resilient are they? What’s the risk of price competition or of variable costs increasing and putting pressure on margins?
Last but not least I would also always consider technology. Does the business have any proprietary technology or IP? Is there any risk of obsolescence? If the technology is partner-driven is there any exclusivity to the partnership? Is so, for how long, and how are the parameters of exclusivity defined? If they’re using somebody else's technology, they may have little control over their variable costs over time particularly if supply agreements are not long term.