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How Consolidation is gaining traction in Latin America

Unlike Europe, where revenue in the telecom sector has been gradually declining over the last few years, Latin America’s telecom sector is one of the world’s fastest-growing markets.

Despite its slow regional economic growth and uncertain regulatory landscape, Latin America continues to show substantial opportunities now and in the future. These opportunities are due to the increasing adoption of affordable smartphones, a stronger demand for mobile data subscriptions, and the expansion of 4G-LTE for speed and 3G for coverage. This results in the need for an overhaul to the network infrastructure to effectively cover the Latin American market and meet subscribers’ increasing demand for better and more efficient services.

Latin America’s M&A Leaders

We have already witnessed some landscape modifications with several mergers and acquisitions in 2014 and 2015. Considering that Brazilian and Mexican telecom companies dominate the Latin American region, it’s no surprise that they are also are the leaders of the M&A activity.

Brazil

In Brazil, America Movil merged its three Brazilian operations—Claro, Embratel and Net—at the end of 2014. In addition, Telefonica Brasil (VIVO) sealed a deal with French-based Vivendi’s Global Village Telecom (GVT). Then, a potential merge between Oi and TIM, controlled by Telecom Italia, has gained momentum. Because Brazil is currently in a recession and there is a decline of its local currency, Russian billionaire Mikhail Fridman agreed to inject $4 billion into Oi on the condition that it merges with TIM.

Mexico

Mexico is also going through several configuration changes and consolidations. One example is the entry of AT&T in Mexico, integrating Iusacell and Nextel operations with a strong focus on the wireless market. Another example is the signed merger agreement between Axtel and Alestra in December 2015, which is focused on data services, data centers and telecom specialised services. The merger will help create a consolidated group that can compete against bigger players in this specialised arena.

Other Latin American M&A Leaders

Throughout the rest of Latin America, including the Caribbean, Cable & Wireless Communication Plc (CWC) has also been instigating consolidation. After acquiring 100% of the equity of Columbus International Inc. and completing the merger in March 2015, CWC announced that its board has reached an agreement on the terms of a recommended acquisition for all of CWC’s shared capital - issued or otherwise. The buyer is Liberty Global, a large international cable television company with nearly 27 million subscribers, currently with most operations in Europe but growing ambitions in CALA. It is believed that this merger will enhance faster growth and increase customer benefits.

This merger frenzy by global groups is primarily driven by the growing expansion ambitions in Latin America and the Caribbean, where potential market growth is still huge, despite the ARPU decline and the growing cost of infrastructure. However, companies are eager to develop next-generation mobile services and create a technology-based environment to get an edge, offering more advanced and engaging services at an affordable price.

Key M&A Opportunities

Until recently, monopolies have dominated the traditional telecom industry in Latin America. The fact that new players are joining forces to take leadership roles is very important. New players are making strong efforts to create an economy of scale and compete against these monopolies.

The regulatory environment is also helping boost M&A trends in the region. In Mexico, for example, the overhaul of telecom regulation—led by the Mexican government—is designed to facilitate market access for new competitors, with an aim toward reducing the power of the dominant companies.

Another key driver achieved by combining assets and strengths through M&A is the ability to solidify infrastructures and grow assets even faster. This allows operators to offer first-class products and services to meet the needs of mobile and telephony end users who are constantly looking for a quick and superior customer experience.

Overcoming M&A Challenges

Similar to what has happened in Europe, Latin American operators have to face numerous challenges while going through an M&A process. These include:

  • Developing a strategic plan that includes organisational dynamics and cultural integration of human resources
  • Structuring financial modelling that makes sense in the given economic climate
  • Negotiating contracts
  • Achieving regulatory approval
  • Closing, and integrating systems and services

Throughout the entire M&A process, clear and constant communication is critical to the success of the overall venture.

After the merge, systems integration is key, with the main focus typically on IT and network integration. Overlaps need to be identified, while guaranteeing stable operations and services throughout the process. IT integration seems to be one of the most challenging tasks in the merger activity because disparate legacy systems, fragmented architecture and non-standard processes or proprietary requirements are in play. Therefore, a transformation strategy plan within the overall merger roadmap is very important as part of the so-called cost and capital expenditure synergies. For example, AT&T in Mexico is making considerable investments and focusing on the integration and upgrade of the two companies’ IT and network systems being merged.

While cost and capital synergies need to be implemented with careful planning, operators in the process of a merger also need to take the customer-facing domains into consideration in order to minimise customer impact, avoid churn in the transformation process, and keep achieving wins and revenue synergies. Therefore, merger transformations need to be accompanied by a very strong and planned marketing, distribution and communications campaign.

Despite the threat of the economic recession, particularly in Brazil, Latin America’s telecom market is expected to continue to grow. A 4G/LTE investment will accelerate rapidly throughout the region. At the edge of the new digital technological revolution, carriers will need to invest, more than ever, billions of dollars into high-speed broadband networks to create a solid infrastructure base to face the demand of market acceleration. In addition to the ambition of a geographic expansion and strengthening position against monopolistic local competitors, new companies created through M&A will help support the sector growth trends through the convergence of product portfolios. These new product portfolios must provide competitively priced bundles (quadruple-play services) of consumer-facing products. Also, new consolidated offers with innovative business models (B2B, B2G, M2M & IoT) are expected to grow faster.

M&A trends appear to be inevitable in this fast-growing region as they are needed to increase scale and capabilities, while enhancing customer experience. However, Latin America’s success will depend on effective planning and focus by operators who must overcome the challenge of complex integration at all organisational levels.

Samia Bounaira is the General Manager for Caribbean and Latin America Markets at Excelacom.

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