Cash-rich Western telecommunications companies like to talk about expanding into emerging markets. Yet right now it's the smaller players in developing countries that are doing most of the deals. Data compiled by Bloomberg show that so far this year emerging market telecoms beat Western rivals 10 to 1 in terms of money spent on deals valued at more than $1 billion. With $126 billion of telecommunications mergers and acquisitions in emerging nations, up threefold from the comparable period in 2009, the race for assets in markets across Africa, Asia, Eastern Europe, Latin America, and the Middle East shows no sign of abating. Spanish telecom Telefónica's (TEF) $9.6 billion takeover of Brazil's No. 1 mobile-phone operator was the only deal this year over $1 billion for an emerging-market asset that involved a major Western player. The rest were led by Mexico's América Móvil, Russia's VimpelCom (VIP), and the United Arab Emirates' Emirates Telecommunications, better known as Etisalat. "The emerging-market players are much more confident about taking on risk and M&A expansion," says Christian Lesueur, head of UBS' (UBS) telecommunications investment banking division for Europe, the Middle East, and Africa. "They don't have a lot of cash, but their balance sheets are not that highly geared [leveraged]."
Big Western telecommunication companies, some of which have been burnt by earlier investments, aren't expected to sit on the sidelines for long. "My expectation is to see Western players reenter these markets because that is where they will find growth," says Nader Mousavizadeh, chief executive officer of U.K.-based Oxford Analytica, an economic analysis and advisory firm.
That's why for emerging-market operators, the name of the game is eat or be eaten. Those that don't bulk up through acquisition risk becoming takeover bait themselves—or being elbowed out of the market by larger rivals. "You need an international footprint," says Vincent le Stradic, who manages Lazard's (LAZ) European, Middle East, and Africa telecom group. "In a moving sector like this, what is the long-term future of a single entity with 2 to 3 million subscribers?"
The number of large-scale targets is dwindling, following this year's string of deals. One possible candidate is Millicom International Cellular (MICC), with more than 30 million customers in emerging markets and a market value of about $10 billion, says Mark James, an analyst at Liberum Capital in London. Emily Hunt, a spokeswoman for Luxembourg-based Millicom, declined to comment. VimpelCom says it may sell the Algerian unit of Orascom Telecom Holding, which it will acquire as part of its pending $22 billion merger with Weather Investments. The Russian company values the unit at $7.8 billion. Etisalat, the UAE's biggest phone company, is also seeking a buyer for the Saudi operator it will pick up as part of its pending $12 billion takeover of Zain's Middle East assets. In Eastern Europe, Serbia wants almost $2 billion for its stake in Telekom Srbija and may attract companies including Deutsche Telekom, Telekom Austria (TKA), and France Telecom (FTE).
Some European telecommunications companies have recently flagged developing markets for expansion. France Telecom has said it may spend up to $9.7 billion on emerging-market deals by 2015, while U.K.-based Vodafone Group (VOD), the world's largest mobile operator by revenue, is targeting sub-Saharan Africa and India as "priority areas" for expansion. U.S. carriers, none of which has made an acquisition of more than $1 billion in those regions, seem to be in no mood to go shopping abroad. UBS's Lesueur says the prevailing attitude among many Western players is "don't do M&A, and give our money back to shareholders in dividends."
There's reason to be cautious. Many Western carriers have sustained losses in developing markets. The Indian unit of Norway's Telenor racked up $646 million of operating losses in the first nine months of this year, after its debut in the Indian mobile-phone market in December 2009. Vodafone booked a $3.3 billion charge for its Indian unit in May, citing fierce price competition. "Poison is always a matter of the dosage," says Hamburg-based Boris Boehm, who helps manage about €1 billion ($1.4 billion) at Aramea Asset Management, including France Telecom and Vodafone shares. "Western companies have certainly had some bad experiences in emerging markets."
The bottom line: Western telecommunications giants are on the sidelines while emerging-market players are scooping up their peers.