Why Telecom Is Driving Investment Deals

This article was originally published in Daily Business Review. Any opinions in this article are not those of Winston & Strawn or its clients. The opinions in this article are the authors’ opinions only.

The COVID-19 pandemic spawned a number of opportunities as businesses across the world raced to meet essential needs. Remote work, virtual school and social-distancing measures accelerated the need for technology to adapt, which has resulted in an unprecedented transformation of the telecom sector. Accessible and affordable telecom services grew evermore important during lockdowns and proved to be a “pandemic-proof” industry for investors.

According to PwC, there has been a 28% year-over-year increase in M&A activity in the media and telecommunications sector, with deal value totaling a record $469 billion. Private equity deals in the space also increased this year, representing $194 billion of announced deal value, around three-quarters of which was concentrated in the internet and software space.

Despite challenges such as geopolitical uncertainty, inflation, rising interest rates and fears of a recession, investment in the telecommunications sector shows no signs of slowing down. This article will cover trends that are driving investments and mergers and acquisitions (M&As) in the telecom sector.

Emerging Markets Focus on Fiber

Demand for broadband and connectivity solutions remain strong in Latin America, and many of the region’s largest telecom players are focused on expanding their fiber networks and preparing for 5G. According to S&P Global, broadband penetration is expected to reach over 50% of Latin American households by year-end 2022, with fiber driving growth. Fiber is projected to become the region’s largest fixed broadband platform, reaching one in five Latin American households by the end of the year.

Infrastructure Paves a High-Speed Future

In the United States, the recently passed federal infrastructure deal is delivering a historic $65 billion for broadband infrastructure deployment, $42 billion of which will go to the Broadband Equity, Access and Deployment (BEAD) program. The BEAD program will provide unprecedented funding to states to power deployments in underserved areas, and specifies that grant opportunities must be open to cooperatives, nonprofits, public-private partnerships, private entities, utilities and local governments.

In addition to this government funding, private investors are also in the mix and have their sights set on tower and fiber assets. U.S. investors are eager to break into the European market, which is more fragmented than the more mature U.S. market.

In-Country Consolidation

While restrictive regulations act as a hurdle in some regions, in-market consolidation remains a priority to create a more sustainable telecom landscape. In-country consolidation provides a means for operators that are saddled with debt to gain scale and decrease fixed costs. There are numerous examples of large, European telecom companies that have successfully grown through M&A transactions, and more companies are setting their sights on potential targets. The hope is that the need for high-speed networks will help regulators realize the value of investment, allowing for additional consolidation.

Doubling Down on Disaggregation

Pressure from customers, employees, and shareholders to be greener has organizations across all industries looking for ways to improve their environmental, social and governance (ESG) performance. Disaggregated networks offer a more eco-friendly, scalable alternative to their traditional predecessors. In a disaggregated network, which is primarily based on software, operators can easily switch software vendors without needing to tear out and replace existing hardware.

Strategic M&A investments by both strategic and financial investor has rebounded dramatically in the telecommunications space over the past two years. I expect the telecom sector to continue growing given that investors view telecom assets as a safe bet to hedge against the potential recession. This growth will further be bolstered by the unprecedented demand for telecommunication and data supply.