Analysys Mason: 2024 predictions for M&A activity in the telecoms market
About our M&A predictions
We will all look back at 2023 as a year of transformation. Many companies in the telecoms, media and technology (TMT) industry focused on ensuring that the fundamentals of their core business models were robust even at the cost of an operational restructuring and/or changes in the capital structure. It was a year that saw a greater emphasis on financing deals than before, which partially offset the slowdown in equity deals.
At Analysys Mason, we have continued to serve our clients throughout the year with industry-specific and analytically robust advice. We are committed to both our cornerstone value of independence, and to remaining at the forefront of innovation in the industry in order to best support our wide range of clients. As part of this effort, we are happy to present our customary top 10 M&A predictions for 2024. We wish you all a great new year and plenty of deal making!
Prediction 1: Better than 2023 but with variations across asset classes and regions
The industry consensus is that deal activity will be higher in 2024 than it was in 2023. Financial advisors point to the amount of un-allocated capital, along with the large number of mandates waiting for the process to be launched (backlog). However, advisors still cite value expectations as a challenge, as funds on the sell side have not fully adjusted their evaluations.
Despite that overall positive outlook, long-term bond yields have recently fallen, indicating that the market has priced-in interest rate falls. The “higher for longer” mantra may be waning, but it takes longer for capital allocation to change and for jumpy credit committees to readjust.
Core cash-generating digital infrastructure assets will likely be in high demand as long-term infrastructure funds can now bank on the cost of debt falling. For greenfield assets (e.g. altnet fibre-to-the-premises) which require further capital, it is likely that existing equity holders will have to contribute once again before businesses can demonstrate sustained tracking of key performance indicators to deliver their business plans and become EBITDA positive.
More traditional Private Equity, with its leveraged buyout (LBO) model and shorter horizon, will likely see more processes come to market, maybe with Q3 being the busiest. However, all parties should take heed of the struggles with getting deals done recently. Businesses need to be properly prepared; Investment Committees are unwilling to accept issues which arise in diligence that should have been foreseen, mitigated and communicated ahead of the formal process starting.
Charles Murray, Partner
Prediction 2: AI will start to be integrated into investor’s M&A valuations
2024 will see AI become more important to investors and their assessment of M&A targets, enabling better understanding of their growth drivers and efficiency opportunities and risks.
- What efficiency can AI deliver for the target? Private equity players will focus on efficiency and operational performance to improve EBITDA as topline growth is tougher in mature businesses. We have already seen AI contribute to productivity gains in places like contact centres, although it is not yet ready to replace human agents altogether.
- How can AI be used to boost the target’s growth agenda? AI-based bolt-ons (typically start-up companies) will help drive deal volume in the IT services sector, which has substantial private equity backing. IT services firms will be looking at AI across the service spectrum, from external AI consulting work to driving internal efficiency and augmentation of clients’ in-house platforms.
- Is the target's business model at risk from an AI start-up? Growth capital will continue to be evaluating pure AI start-ups looking to disrupt existing business models. There has already been a lot of deal activity here, but higher debt costs mean positive EBITDA generation may be prioritised over revenue growth. An exit to an existing trade player that is at risk of losing share will become an increasingly appealing option and, as such, AI bolt-ons need to be assessed as part of the diligence process.
Charles Murray, Partner
Prediction 3: AI applications will drive investment demand for new hyperscale facilities and upgrade of existing data centres
2023 was the year GenAI exploded and use cases are still proliferating, which will lead to new (and bigger) model training and inferences both for B2B and B2C applications. The training and the use of these advanced AI models are, and will continue to be, run in the Cloud (instead of, for example, on-premises), driving demand for cloud-computing power. In addition, strengthening regulation on AI (such as the AI Act which was just passed in Europe) also requires local data processing and segmentation (both model training and inference) leading to an increase in localised computing requirements.
As a result, demand for ‘AI-compatible’ co-location space from Cloud giants, new local champions and large wholesalers should explode, which should drive the creation of hyperscale greenfield facilities and the retrofit of older facilities to accommodate the higher power-density required for AI. Low-latency AI-inference workflows should also, in the medium to longer term, drive increased adoption of edge-facilities. This increasing demand could be addressed by large, specialised data centre players (which can raise the considerable capex required for hyperscale facilities), as well as telecoms operators – who are increasingly considering data centre carve-out opportunities to foster growth and diversification.
Stéphane Piot, Partner and Sylvain Loizeau, Principal
Prediction 4: Transactions in Internet and Technology verticals expected to recover from the lows of 2023
Private equity and venture capital investments in the Internet and Technology verticals have started to see some uptick during the second half of 2023 and, as a result, we expect internet/technology companies to bounce back during the second half of 2024. In most cases, economic uncertainties and consumer behaviour’s reversion after Covid-19 have created a less conducive environment for the consumer/internet tech space at large. However, despite that we still expect the emergence of new winners leveraging the recent AI advancements and creation of new business models, especially in developing economies – due to lower staffing costs and increasing internet penetration. We expect companies to increasingly prioritise profitability over rapid expansion. Scarcer capital and pressure from existing investors to realise their gains will give way to more sustainable business models, moreover, this space will also witness significant consolidation across various verticals such as logistics, fintech, direct-to-consumer brands to name a few.
Ashwinder Sethi, Partner
Prediction 5: Belief in the turnaround potential for unprofitable operations will drive telecoms M&A deals
2024 is expected to see an acceleration in M&A deals; so far, announcements of M&As involving retail telecoms operators have consistently featured in news feeds, but many deals did not materialise at the speed we expected. The problems fuelling supply (willingness to sell assets) are not necessarily new and include: persistent high inflation, weak balance sheets for some operators, decisions of multi-national operators to re-trench in profitable markets, and capex intensive business models. On the other hand, demand for telecoms operators appears to be revitalised by the belief that restructuring unprofitable operations is possible through both efficiencies and commercial initiatives (e.g. will inflation-indexed retail price become an established market practice?) even in competitive markets. This opportunity is being closely considered by private equity funds that are looking for the right opportunity. Last, but not least, we expect to see further investments from Middle Eastern operators interested in expanding their footprints in other regions by leveraging their strong balance sheets and ambitious business models.
Alessandro Ravagnolo, Partner
Prediction 6: Land aggregators will see an investment renaissance
Land aggregation has been a mature investment area in North America for a long time, but historically less so in other regions – which Analysys Mason now expects to accelerate. Nowadays, most lease platforms are focussing on creating a positive relationship with tower owners, which is expected to lead to the creation of long-term master lease agreements (MLAs) benefiting both parties. This will result in an expansion of the addressable market – for example, through go-to-market collaborations, land leases sales and lease-backs from towercos – and an increase in appeal for low cost of capital investors, thanks to the enhanced cashflow-predictability and downside-protected nature of the business model. More investors are realising that land aggregators can be great platforms to replicate the investment model across similar sub-asset classes (nodes/switches, landing stations, solar farms, etc.), which can offer significant opportunities to scale-up the business more quickly and efficiently.
Alessandro Ravagnolo, Partner
Prediction 7: Consolidation in the satellite teleport industry will increase, including potential carve-outs by major operators
Demand for services from satellite teleports is forecast to grow in support of increasing satellite capacity (driven in part by the proliferation of low-earth orbit constellations, such as Starlink and OneWeb). However, the current ground-segment ecosystem is relatively dispersed, and vertically integrated teleports are generally underutilised – creating the opportunity for carve-outs by satellite operators looking to invest in new launches or reduce debt in a high-interest-rate environment. As global operators become more open to outsourcing teleport services (to meet demand for in-country gateways and take advantage of virtualisation/ground segment 'as-a-service'), we expect to see more transactions in the satellite teleport industry, including the start of carve-outs by major satellite operators. This will allow for better utilisation of existing ground-segment infrastructure and more efficient use of new sites, with teleports hosting multiple gateways connecting to various satellite operators across geostationary, middle- and low-earth orbit.
Alexander Ohlsson, Manager
Prediction 8: Digital transformation, IT consulting and AI will drive deals in IT services
ICT services have already enjoyed significant growth through the transition to cloud computing. Continuing growth will require keeping on top of the next wave, which is formed of a mixture of digital transformation, IT consulting and AI.
Digital transformation is already a well-trodden path for buy-build platforms. However, digital transformation also generates the need for influence earlier and earlier in the IT life cycle. Thus, buy-build platforms are looking at buying IT consulting firms to deliver that influence. We expect 2024 will see deals targeting larger firms with more material IT consulting capabilities, although the people-integration issues associated with professional services firms need to be properly thought through.
AI has been strongly hyped so far, strengthened by Microsoft’s rapid deployment of large language models (LLMs) in the form of Microsoft Copilot throughout both the M365 suite and Dynamics. The productivity improvements from AI will be welcome, but unlikely to be transformative in IT services. Any company willing to spend the money per user per month can get access to the same Copilot technology and so this will not be a differentiator between firms. Real competitive differentiation comes from using AI or machine learning on a company’s own data, a process which is much more complex than deploying Copilot and requires data engineers and data scientists, as well as sufficient and well-structured data. Companies are recruiting these specialists in competition with IT services firms, meaning that resource availability will be a constraint on the expected overall growth in IT services.
Harmeet Chana, Principal and Charles Murray, Partner
Prediction 9: Charging ahead with developments in the UK's EV charging infrastructure market
The UK’s electric vehicle charging infrastructure (EVCI) market is set to expand in 2024 due to rising EV adoption and demand for charging solutions, backed by government policies and funding. Despite exceeding 50 000 charging points in 2023, significantly more infrastructure is needed to meet the government’s minimum 2030 target of 300 000 public charging points. Industry heavyweights will pursue growth in rapid charging – particularly in service stations, car parks, and fleet charging sites – while start-ups will continue to focus on local authority tenders for public EVCI, as well as destination and workplace charging. We will also see growth in public EVCI provided by homeowners through parking platforms like JustPark and Yourparkingspace which present an interesting niche. The much-awaited large consolidation drive in the UK’s EVCI industry will not materialise yet in 2024, as capital raising activity will continue to dominate the transactions activity.
Alex Pericleous, Principal
Prediction 10: Anti-greenwashing regulations will increase the importance of sustainability in the transaction process
In recent years, sustainability factors and the environmental, social and governance (ESG) framework have gained increasing prominence in investment decisions. We expect this to escalate in 2024, driven by global regulatory efforts to combat ‘greenwashing’ through more mandatory disclosures of a companies' sustainability achievements. Regulatory focus extends to challenging areas such as Scope 3 emissions, the indirect emissions stemming from a company’s value chain. Even investments not focused on sustainability will likely face pressures, either from disclosure obligations or evolving customer preferences, necessitating an assessment of a company’s sustainability performance. For investors, heightened scrutiny is imperative when evaluating the legitimacy of sustainability or ‘green’ claims associated with investment decisions, given the potential repercussions. While TMT companies generally exhibit a ‘green’ profile, it is crucial to delve into specific risks, typically including: energy sources (including on-site generation), health and safety practices, management systems, and supplier management.
Maria Tunberg, Partner and Anurag Dey, Manager
More 2024 predictions
We would be pleased to have further discussions on our top predictions, as well as other – no less important – predictions that did not make the shortlist this year. We expect 2024 to be another exciting year for deal makers, with a completely new set of challenges to be overcome. We look forward to sharing this journey with our clients as a trusted commercial, technical and transformation adviser.
Analysys Mason is the commercial and technical adviser of choice of multiple major financial investors and industry players due to our focus on TMT, convergent digital vertical sectors and the experience that we have gained in over 800 transaction support assignments worldwide during the last five years.
Do you have any comments on our M&A predictions for 2024? Please get in touch with Alessandro Ravagnolo.
Do you want to read more predictions for the TMT industry in 2024? Click here.