Fueled, in part, by the global lock-down and work/school-from-home behavior, telecommunications has never been more essential. With more money chasing fewer opportunities, the investment community certainly recognizes this new reality. During frothy times with valuations exceeding 20x earnings, the need to critically assess all aspects of the business pre-bid is especially important. This starts with the network.
It doesn’t matter if you’re a non-strategic (finance) or strategic (operator) telecom investor. You must fully evaluate the current state and the future readiness of the network. This should include getting a view on the upgrade options including FTTH. Network technology assessments typically consist of two phases. The first phase, which typically takes about three weeks, involves the analysis of all relevant documents in the virtual data room and interviews of technology executives at the acquisition target. It will cover such aspects as basic information about inside and outside plant, organizational structure, OSS/BSS, capital budgets, capital maintenance, trouble call history and service records. If parts of the operator’s footprint are supplied through contracts with others, leases and IRUs (indefeasible rights of use) must be closely scrutinized. Without with a clear and comprehensive understanding of each contact’s terms including the dependencies, the prospective buyer is taking unnecessary risks.
The second phase involves an on-site visit to evaluate the condition of the infrastructure and the NOC, and possibly discussions with field personnel. For larger distributed operators, the inspections should occur in multiple representative markets. If visits are not possible, the seller should supply a full set of photographs. Another option is a livestream or recorded tour. Overall, the process can take about six weeks.
What the final report entails depends on the type of network and what the potential acquirer hopes to do with it. It’s not unusual for a prospective buyer to request a report which encompasses not only an assessment of the plant, inside and out, but also the possible upgrade paths. If not already FTTX, upgrading to FTTX might be the right move. However, it’s costly and may not be the better option in the near-term. If the system is HFC today, competitive upload/download speeds suited to your customers might be cost-effectively achieved by changing to mid-split or high-split, perhaps along with DAA and short amplifier cascades and a DOCSIS 4.0 upgrade. The correct path depends mightily on the state of the existing network. An advisor that has a firm understanding of the existing system’s capabilities, and the effort required to upgrade them is key.
Here are some of the other questions the report should answer:
- Who are the equipment suppliers are and do they offer a credible upgrade path on the installed systems?
- Was the equipment installed properly? (We saw one system install indoor ONTs outdoors!)
- What are the costs of potential construction — labor and materials?
- Are existing Internet connections adequate?
- Is the operator’s technical team up to the task of maintaining and expanding the network?
Who should generate the questions, ask them and judge the answers? While many of the participating private equity firms and infrastructure funds have former telecom executives on their rosters, few are likely to have the depth of expertise necessary to conduct a thorough technical audit. As for operators seeking other operators, in-house resources exist. However, they may be unavailable and/or an independent expert is preferred. That’s where a good technical advisor can come in handy.
When choosing an advisor, we recommend working with a professionals with contemporary and relevant experience in the field. For example, consider recent service provider executives with a background in network engineering and operations. Another factor to consider is their direct due diligence experience. Who have they supported? In which deals (if their client won and they’re allowed to reveal this)? What’s their reputation? To get a sense of the depth of their analysis and the quality of their work, ask to see a redacted report. The ability to translate the technical parameters of the acquisition target’s network into terms the investor can understand and relate them to business goals can also prove valuable. An intangible, but important, factor is the chemistry between the technical advisor and the client. Frequently asked to work on a compressed time path, the technical advisor must be very responsive – almost anticipating their client’s wishes. The technical advisor’s ability to effectively collaborate with the other advisors is also key.
Up until this sentence, this post has been buy-side centric. However, more and more prospective sellers, are lining up technical advisors to conduct independent network audits which are shared with the pool of possible bidders. Both the seller and the buyer can benefit from this approach. This may serve to shorten the transaction timeframe if the seller comes to the table with the report. Also, the technical due diligence expense for each prospective buyer may be lower if the report cost is incurred by the seller or split amongst the bidders.
Whether sourced by the prospective seller or buyer, the network assessment performed by a highly qualified technical advisor is a critical and necessary due diligence element of the telecom M&A process. Then, there’s post-acquisition integration. But, we’ll save that for a future post.