Private-equity buyout companies are the darlings of Wall Street, snapping up companies left and right and flush with the cash to do so. According to Thomson Financial, buyouts by private-equity companies accounted for more than 25 percent of the total merger-and-acquisition activity in the U.S. last year-an unprecedented figure.
Some of the deals touched upon the wireless industry, as with the purchase of 80.1 percent of Royal Philips Electronics’ semiconductor business by a consortium of private-equity firms last September.
So, is it just a matter of time before carriers themselves are the targets of private equity buyout companies? The rumors are certainly there. The Wall Street Journal reported last week that private-equity giant Blackstone Group is looking at buying a stake in Telecom Italia. Speculation has surfaced about the possibility of companies such as Texas Instruments Inc. and Sprint Nextel Corp. being acquired by private-equity firms. When Alltel Corp. President and CEO Scott Ford talked about the carrier reviewing a “wide span of options,” analysts took it as a tacit announcement that Alltel is up for sale. While the usual suspects of Verizon Wireless and Sprint Nextel came up as possible buyers, so did private equity.
There are multiple strategies that private-equity buyout companies take, according to Robert Keiser, vice president with Thomson Financial Proprietary Research. Those include:
- Purchasing companies that are undervalued, could easily have their operations tweaked and then be sold at a profit.
- Buying companies in a fundamentally sound market that are poorly run. The buyout company improves efficiency and operations, then spins the company back out.
- A consolidation play, where multiple companies are bought and consolidated to build a single company with much greater market share and scale.
“There’s no one rule that generally applies to all buyout deals,” Keiser said.
He added that buyout companies and their cousins-venture capitalists-are looking at the wireless industry very differently.
Wireless too competitive?
“The buyout sector’s interest in wireless actually has been trending lower, while the venture community has increasingly been turning its attention to wireless communication,” Keiser said. The stiff competition in the wireless industry is one possible reason why buyout companies are hesitant to date, but venture capitalists are pouring in money.
“It’s an industry that is currently seeing a lot of competition and . venture capital may see this as an opportunity to come up with the next big thing that is going to differentiate one competitor in wireless from another.” Keiser said. He added that it’s possible that buyout interest could shift to the wireless industry if the market valuations of companies were sufficiently cheap.
Tower Group analyst Bob Egan said that the possibility of widespread interest in wireless carriers themselves by private-equity companies is unlikely, due to the necessary investments in infrastructure and operating expenditures.
“These are very high-capital, op-ex intensive operations, which is not characteristic of what we have seen of deals for public companies that have been taken private,” Egan said. The types of companies which PE companies have so far targeted, Egan said, “I would not consider them on the same playing field as a telco.”
MVNO market a different animal
However, Egan said, the MVNO market is “a completely different animal” that may well be suited for private-equity acquisitions.
“I just can’t say enough bad things about the existing MVNO market,” Egan said. “This is a suicidal marketplace as it is currently structured, and it may be very ripe for a certain investment thesis around private equity.”
The wireless subsidiary of diversified holdings company Titan Global Holdings Inc. announced last week that it had snapped up a small prepaid mobile virtual network operator called Ready Mobile L.L.C. Ready Mobile had only been operating for a year and had about 30,000 subscribers, and Titan said the company was just the first of its acquisition targets, and that the Ready Mobile acquisition is “consistent with [its] stated strategic plan to opportunistically acquire and roll up competitive MVNOs. Titan has and will target and pursue other MVNOs through 2007 for similarly structured acquisitions.”
Egan also didn’t rule out the possibility that the rumors of private-equity companies taking an interest in mobile operators could turn true, if the buyout firms start putting money into other types of companies as well.
“The minute I saw private equity being thrown at the auto or airline industry, then I would suggest that there are similar traits that then could be made for supporting rumors in the telco space,” Egan said.
The next day, the Financial Times reported that four private-equity firms have had preliminary discussions with Daimler Chrysler AG about buying its struggling U.S. operation, the Chrysler Group.
