The mobile operators are now moving to an ongoing revenue model – a big shift away from the dealer commission model – and we see this as a real opportunity for mobile businesses to build value in their business. Buyers will always look at the quality of earnings, and a recurring revenue model is far more attractive than a one-off commission model as it adds a degree of security to earnings.
There have been a few transactions in the mobile sector over the year, but nowhere near as much activity as expected, and we suspect that the operator's contract terms are influencing buyers’ appetite for deals. This is because the mobile network supplier agreements include some remarkably terse clauses and the ‘Change of Control’ clause in particular is having a real impact on company value. This clause means that if you are looking to sell your business you have to go, cap in hand to the networks and effectively seek their permission to sell your own business.
We are aware of several instances of seriously unsporting behaviour from the networks. Unless a buyer has a particularly strong alliance with an operator, issues can range from delaying the transaction, using the deal as a bargaining chip to increase their share of the buyers’ connections, to the extreme scenario in which consent was not granted and the network insisted on acquiring the company itself at a lower value than offered previously.
As the size of transaction increases so does the level of risk surrounding Change of Control and this goes straight to value. We have sold several companies where mobile represents a part of the overall transaction and invariably the mobile base will be at a discount to the fixed line base. Buyers are assessing the level of control a Mobile Operator will want to exert when they in turn look to sell, and factoring in this risk causes the valuation to drop or, in some cases, killed the deal.
Compare the mobile market to the fixed-line sector. BT is regulated and its network arm, OpenReach, has to sell to all parties on equal terms. There is a large pool of wholesale suppliers of fixed-line services using a variety of technologies that all have to compete hard to win the business of the most successful resellers. In open competition, ‘Change of Control’ clauses are not tolerated and as companies develop acquisitions have become part of the growth cycle with competition driving up valuations and prices.
In the mobile sector, despite their market power the mobile operators enjoy lighter touch regulation. Mobile operators have been allowed to exert a degree of influence over the independent channel that does not exist in the fixed-line market. The best deals are reserved for those that commit their business near exclusively to one party. There is nothing wrong with this in principle, but unlike the fixed-line sector where parties are free to move their business to another supplier, the mobile operators simply will not allow it and can threaten to take complete ownership of a customer base if this is attempted. When you look to sell your business this means that you need to find a buyer that is also allied to your chosen network (which reduces the number of buyers), and each buyer themselves need to consider the risk of building up too much exposure to a party that will look to exert this level of control and influence over their business.
Of late, the mobile networks have certainly taken a renewed interest in the channel and are offering a range of innovative propositions that align the channel with their own objectives. The channel has shown that it is clearly the best route to reaching the SME customer and in return the mobile operators need to show more trust and commitment to the channel. This is a dynamic sector, with some of the most talented entrepreneurs in the country. The operators need to cut the apron strings, release their partners from these obligations that can frustrate competition, and trust them to grow and develop in a truly competitive environment. The best, not the favourite, will prosper, and build real value in their business, end-users will benefit and this will drive growth for the operators.
About Knight Corporate Finance
Knight Corporate Finance is owned and managed by Paul Billingham and Adam Zoldan (pictured left), who have both worked in the industry since the early nineties. Billingham worked for service provider Martin Dawes prior to its sale to O2 (or Cellnet as it was then), helped develop Opal Telecom from inception through to its acquisition by Carphone Warehouse, and subsequently oversaw around 15 acquisitions.
Zoldan started his career at the service provider Cellcom before joining PricewaterhouseCoopers Corporate Finance, where he focussed on TMT deals. He left to set up a fixed-line reseller, which was subsequently sold to Opal Telecom – where he met Billingham across the table.