Telecoms specialists look East for the hottest M&A action
13 March 2006
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Last week's announcement of the takeover of AT&T by SBC Commun-ications was the latest in a string of multibillion-dollar M&A deals in the telecoms sector. The all-US deal highlighted both the frenetic levels of activity in the market, not seen since the dotcom days, and the demand for corporate lawyers with a track record in telecoms deals.
The AT&T deal was entirely a US matter, reflecting the consolidation in the US. Internationally, however, major US telecoms businesses have largely pulled in their horns, and among several hot emerging markets it is the Middle East that is generating most of the interest among the top law firms.
As Freshfields Bruckhaus Deringer global co-head of technology, media and telecoms (TMT) Simon Marchant says, the Middle East is a "regional growth story" and not one in any way confined to telecoms. "But telecoms is a hot sector generally," he adds. "So put the two together and you can see why there's a lot of interest."
Linklaters partner Tim Schwarz, who takes over as global head of the firm's TMT team on 1 May, expects to lead the firm's expansion in the region, which was kickstarted last year by the hire of his former Clifford Chance colleagues Ewan Cameron and Scott Campbell.
For Schwarz, the Middle East is where it's at in the telecoms world. Not only is the region providing a raft of recent deals, such as Saudi Oger's $5.5bn (£3.17bn) acquisiti0on of fixed-line operator Turk Telekom last year and the current bids for Tunisie Telecom, it is also throwing up a new breed of telecoms player which is beginning to cause the leading firms in the sector a few headaches.
According to Schwarz, Middle East telecoms businesses such as Mobile Telecommunications Company (MTC), Etisalat of the United Arab Emirates and Saudi Oger are "taking the global telecoms sector by storm".
MTC is emblematic of how this new breed of cash-rich telecoms company is rolling out from the Middle East region to take on the biggest companies in the world.
"MTC has what it calls its 'three-by-three-by-three strategy'," says Schwarz. "During the first three years - from 2002 to last year - it invested in its home region. In the second three years it began to invest in its surrounding neighbourhood, buying Celtel. It's the third three years that will be the most interesting. That's when it plans to go global. It will be very interesting to see whether it makes it."
Linklaters represented Celtel on its $3.36bn (£1.94bn) sale to MTC in March 2005. Ironically, across the table for MTC was Cameron, then of Clifford Chance and now based in the Dubai office of Linklaters. A canny bit of talent spotting from Schwarz, that.
Etisalat is another Middle East telecoms company on an acquisition spree. The majority shareholder in the satellite-based telecoms services provider Thuraya, it recently outbid the Western favourites to pick up Pakistan Telecom for $2.4bn (£1.38bn). Driven by a strategic imperative to diversify, Etisalat also outbid some 15 telecoms companies recently for Saudi Arabia's second global system for mobile communications (GSM) licence, paying around $2bn (£1.15bn).
It is currently also looking at entering the Afghan telecoms market with a licence for the country's third GSM mobile phone network, and is among the bidders looking to acquire a 35 per cent stake in Tunisia's largest telecoms carrier Tunisie Telecom. Saudi Oger is also among the six bidders.
The emergence of new telecoms companies that are prepared to pay a premium to gain market share is raising significant strategic issues for the leading law firms. In an auction situation, the top teams may be approached by several bidders.
The orthodox view is still to act for the Western heavyweights, but firms such as Linklaters or White & Case, which is extremely active in the region, will be increasingly asking whether they should be looking to represent the new kids on the block. And if so, should they accept the instructions on an exclusive basis?
"It's a delicate balancing act," says Schwarz. "A strong existing client might insist on it, which might stop us acting for whoever might turn out to be the eventual winner."
The return of big-ticket M&A to the telecoms sector, coupled with the rise in telecoms-related capital markets deals and IPOs, is not just good news for corporate lawyers. It is also welcome news for those commercial and regulatory telecoms lawyers who have found the going tough since the halcyon days of the dotcom boom.
Firms with teams of commercial and regulatory telecoms lawyers have been squeezed by a consolidating sector and maturing telecoms businesses that have ramped up their in-house teams.
As Greg Abrahams of recruitment consultants Abrahams Russell puts it: "The telecoms market over the past two or three years on the transactional side has been quite strong, but ever since the tech bubble burst back at the turn of the century, it's been harder for these lawyers to make money. Several of these practices have gone to the wall."
Herbert Smith partner Nick Elverston agrees. "It used to be the case that there was little or no in-house regulatory capacity at many of the telecoms companies. Increasingly they've skilled up," he says. "The lead on regulatory matters now tends to come from the operators themselves. They come to us either for a second opinion or when it gets messy. It's now very difficult to run a regulatory practice."
Thanks to the M&A boom and strengthening capital markets, however, the genuine telecoms specialists (as opposed to hired gun M&A lawyers) may increasingly be back in demand. But only at the firms that are likely to win the big-ticket deals.
As one magic circle partner puts it: "The squeeze is still on in firms that don't get the big deals and are more reliant on day-to-day commercial and regulatory work for primarily domestic telcos."