analysys mason network sharing synergies jul2014

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Analysys Mason Limited 2014 July 2014

Mobile network sharing as a route to in-marketconsolidation in the telecoms market

July 2014Michael Minzlaff

Mobile network operators (MNOs) have publicly supported being able to merge with other businesses in the

same country. Scale is critical if MNOs are to compete for 4G licences and roll out networks and services in line

with those of their competitors. At the same time, operators are under pressure to reduce costs in order to

address the margin impact of flat or declining revenue. This article argues that under certain conditions, network

sharing can be an attractive alternative to M&A, achieving a large proportion of the same cost benefits

(synergies), typically with lower regulatory hurdles and the opportunity for a gradual step-by-step approach as

opposed to an all-or-nothingtransaction.

In-market M&A is expensive and time consuming, and success

is uncertain

M&A deals are constructed on the basis of cost synergies and market repair. The recent approval of Telefnicas

acquisition of E-Plus notwithstanding, the European Commissions concerns and those of national regulators

regarding market synergies are well documented. In Ireland, the Commission mandated strict remedies that

significantly curtailed the potential size of any market synergies. Recent press reporting (for example, in the

Financial Times) suggested significant opposition from national regulators to remedies that were perceived to be

too lenient. The experience of rising retail prices as a result of recent acquisitions will still be fresh in the minds

of national regulators.1

Moreover, our experience has shown that while in-country M&A has led to improved profit margins for the

merged business, this has, in most cases, come at the price of a loss of market share.2Finally, it stands to reason

that in the case of Three Irelands acquisition of Telefnica Ireland, the remedies will increase mobile price

pressure by enabling cable operator UPC Communications Ireland to enter with converged multi-play offers

under a fixed-rate capacity MVNO model.

In summary, significant uncertainty and questions remain, and operators will need to carefully assess the

arguments for and against M&A compared to those of network sharing.

Network sharing offers a lower-risk route to cost synergy

realisation

Network synergies account for a large share of the total value of recent M&A deals in the telecoms market (see

Figure 1). In the example of Telefnicasjust-approved acquisition of E-Plus, network synergies are estimated

at a net present value (NPV) of approximately EUR3 billion and account for 68% of total cost synergies (55% of

overall synergies).

1 For more information, see Analysys MasonsMobile M&A in Western Europe may help to ease pressure on mobile retail

revenue.

2 For more information, see Analysys MasonsMobile in-market consolidation in Western Europe: impact of recent

mergers on margins and market share.
http://www.analysysmason.com/mobile-MA-Oct2013http://www.analysysmason.com/mobile-MA-Oct2013http://www.analysysmason.com/mobile-MA-Oct2013http://www.analysysmason.com/mobile-MA-Oct2013http://www.analysysmason.com/mobile-mergers-Aug2013http://www.analysysmason.com/mobile-mergers-Aug2013http://www.analysysmason.com/mobile-mergers-Aug2013http://www.analysysmason.com/mobile-mergers-Aug2013http://www.analysysmason.com/mobile-mergers-Aug2013http://www.analysysmason.com/mobile-mergers-Aug2013http://www.analysysmason.com/mobile-MA-Oct2013http://www.analysysmason.com/mobile-MA-Oct2013


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Mobile network sharing as a route to in-market consolidation in the telecoms market | 2


Figure 1: Synergy value analysis for the TelefnicaE-Plus merger [Source: Telefnica, 2014]

Network sharing can afford operators many of the same cost synergies as in-market M&A (see Figure 2)deep

network sharing, based on a NetCo model and transferring existing 2G/3G network assets into the joint venture

(JV), enables the JV to consolidate sites to a single grid, share backhaul, transfer and consolidate network

operation and maintenance activities, and optimise the pace of consolidation, equipment refreshes and new

deployments (for example, single visit, SRAN).

Figure 2: Key sources of network cost synergies [Source: Analysys Mason, 2014]

Depth of sharing Examples

Passive Shared sites, towers, cabinets, power, air conditioning

Active Shared radio electronics (amplifiers, cards), backhaul, antennas3

Shared core network elements

Spectrum Spectrum pooling4

Consolidation Golden grid site consolidation

Single visit deployment and upgrades (for example, SRAN)

Shared operation

Joint maintenance

Network sharing deals have been subjected to much less onerous regulatory and competition reviews and

conditions than in-market consolidation deals. The participating operators continue to compete for customers in

the retail and wholesale markets. A wave of network outsourcing has convinced regulators that networks and

services can increasingly be seen as separate. Customers benefit from improved coverage, in particular in rural

areas.

3 Shared antennas are contingent upon spectrum adjacency and radio optimisation constraints.

4 Contingent upon spectrum adjacency.

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4

5

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Distribution

Selling,

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administrativeexpenses

Network

Opex(total)

Capex

In

tegrationcosts

O

perating(total)

Revenue

Total

NPV(EURbillion)

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In deep network sharing agreements, the complexity of unwinding the agreement and (closely intertwined)

networksshould that ever become necessaryrises exponentially. Network sharing deals do not prevent

subsequent acquisitions by a third party (for example, Three Irelandsacquisition of Telefnica Ireland), but

they increase the barriers, while also reducing the pressure for the sharing partners to merge.

Deep network sharing agreementsactive sharing, NetCo, consolidationare a viable route to realising a

significant proportion of the cost synergies normally associated with in-market M&A. The complexity of

sharing agreements and the implications on the operators subsequent M&A option space require careful

assessment by board-level executives.

Analysys Mason has a strong track record advising mobile operators, regulators, and financial

institutions worldwide, building on our deep commercial and technical expertise. We support clients in

assessing, valuing, structuring and implementing network sharing agreements between mobile operators

as an alternative to in-market consolidation, to realise cost synergies, as joint bid vehicle in next-

generation spectrum auctions, and in shaping appropriate regulatory frameworks.

Find out more about our work onnetwork sharingwith mobile operators and regulators.
http://www.analysysmason.com/What-we-offer/Consulting/Transaction-support/Network-sharinghttp://www.analysysmason.com/What-we-offer/Consulting/Transaction-support/Network-sharinghttp://www.analysysmason.com/What-we-offer/Consulting/Transaction-support/Network-sharinghttp://www.analysysmason.com/What-we-offer/Consulting/Transaction-support/Network-sharing

analysys mason network sharing synergies jul2014

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