Telco M&A Responds to NBN Landscape to Boost Revenue Streams

First published in the Australian Financial Review on 23 February 2015


Australian telecommunications merger and acquisition deals last year were largely driven by an industry responding to the threats and opportunities posed by the NBN. The remainder of 2015 will likely see more consolidation in the sector as companies recognise that it is the scaled providers who will prosper in an NBN world.

Here is a look at last year’s telco deals and what that can tell us about where the activity may be this year:

NBN Co: It is not every day an $11 billion deal gets signed, but Telstra and NBN Co have now done their deal twice, signing the new multi-technology-network-enabling contract in mid-December after almost a year of negotiations.

One of the negotiating team said to me: “I’ve done this contract twice now. I don’t have another round in me.” Hopefully, too, for Australia this is the final version.

Also announced late last year were the separate deals between NBN Co and Telstra and Optus enabling the use of the HFC networks left stranded by the original NBN deal.

Telstra opens the purse: In an NBN world, Telstra will procure wholesale fixed services from NBN Co after progressively transferring ownership of Telstra’s copper and HFC assets. Telstra’s acquisitions in 2014 illustrate that Telstra is focused on customer experience and new revenue streams.

On the customer service side, Telstra invested in MountainView-based MATRIXX Software, a company which provides customers with real-time data usage reports. The telco invested in Nexmo, a company that assists with communication to customers and Telstra also joined an investment round into US-based mobile phone authentication services provider, Telesign.

Asian expansion was clearly on the agenda with the acquisition of regional telco Pacnet for $858 million and Telstra is also making an important strategic investment in the Indonesian market via a joint venture with Telekom Indonesia.

Other revenue streams that Telstra invested in include three acquisitions in the eHealth space and a joint venture with Australia’s largest home/business security monitoring company, SMP Security. Telstra chief executive David Thodey has been focused on the growth potential of its cloud computing business and bolstered it during the year with the $60 million (rumoured) acquisition of network integrator and advisory firm, O2 Networks.

Telco buys tech: Telcos need to get up the value chain from pure carriage provision, and consequently many are looking to acquire IT services businesses.

ASX-listed broadband provider BigAir bought managed services provider Oriel Technologies for up to $15 million. Inabox Group bought IT and cloud services provider Annitel for $10 million and iiNet bought 60 per cent of Tech2 Group, a provider of professional technology services under various brands including Gizmo.

Datacentres heat up: Holder of some of the most secure federal government files, Canberra Data Centres received $140 million from Quadrant Private Equity for a 45 per cent stake. While Vocus paid $11.7 million for ASG’s Perth datacentre. Vocus continued its consolidation play buying EDC’s data centre business earlier this month*.

The new contender: Vocus also made a well-received bid to acquire west coast telco, Amcom for $635 million. This will create the nation’s third largest provider of corporate telecommunications when the deal is expected to be approved in April.

ASX open for business: Hong Kong satellite services firm, Speedcast, had iiNet founder Michael Malone join the board and later in the year raised $150 million in an IPO on the ASX. Meanwhile, shopping centre wifi player SkyFii raised $3.5 million in a backdoor listing.

2015: The Australian telco sector is in the midst of big changes with the NBN coming on stream. Change creates opportunity and we should expect this year to see Telstra get even more aggressive in its onshore and offshore M&A strategy.

The junior telcos are likely to continue their consolidation as will data centre providers. IT services companies with a cloud focus can expect to see interest from the telcos as everyone seeks to enhance their revenue streams beyond carriage.

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