deloitte 2016 west_grey matter

Deloitte.Mavericks

West Zone

Team : Grey Matter

Ashwin Jain

Harsh Tewari

Mayank Agrawal

Recommendations

3. Geography Analysis 4. Financial Analysis1. Internal Growth

Analysis

2. Technology

Analysis

Diversify due to industry

saturation, Utilization of

existing assets

Geographic expansion

study for growth avenues

Competitive Grid Matrix

for the 4 targets

Parameter identification

Assessment of technical

capabilities of the targets

on every parameters

Forward Integration

(M2M,IOT,VOIP) are the

future revenue drivers

US and Czech Republic

telecom markets are

flattening

Namibia has strong

Macro-economic

advantages but its

regulatory environment is

regressive

Financially viable

opportunities & accurate

valuation

Strategic

objectives

Analysis

Insights

1. According to Technology Analysis: N Zone is the most viable acquisition target, Financial Analysis reveals its value as : ,smooth

integration is expected if due diligent process is followed

2. According to Geography Analysis ASA Towers is the most viable acquisition target, Financial Analysis reveals its value as : ,smooth

integration is expected with a proper integration plan in place focusing on the cultural risks

4. Integration Analysis

SMB’S are a high

potential target as their

operations expand

Fast adoption of LTE/4G

services is critical for US

Telco’s growth

NZone stands out as the

most aligned business

(technologically) with our

strategic objectives

ASA Towers has the

advantage for gaining

capibilties for new

products & services

Telemo Services will

provide no technological

advantage

EBIDTA margins of ASA:

High Growth

EBIDTA margins of

NZone: Steady Growth

Terminal Growh Rate(for

long term growth) is

highest for ASA Towers

Inc.

Telemo Services’s

valuation is almost 7

times that of US Teclo

NZone: Low

regulation/legislation risk &

low customer retention risk

Synergy Capture is a low

intensity risk for both

selected businesses

ASA Towers: Low target

identification risk but high

cultural risk

Accurate due diligence

process is very critical for

success of the M & A

High speed network

deployment through Co-

location & managed

rooftop systems

Expand services in high

growth regions

Smooth Integration in

M & A

Identifying evaluation

layers for analysis

Assessed Geographies

on Macroeconomic,

Regulatory, Financial &

Technological

environment

Rank the geographies on

the basis of alignment

with our core strategy

Analyzed the Free Cash

Flow as per the

projections & industry

standards

Evaluated targets on

market multiples derived

from past deals

Integration Heat Map

analysis

Assessing the targets on the

basis of standard risks &

considerations in M & A

deals in telecom sector

Devised solutions/way outs

to ensure mitigation of these

risks

Evaluated EBIDTA

margins(the most

important ratio for

telecom sector)

WiMax, Optical Fiber &

Co-location are

promising

Argentina tops the list in

Technological potential &

Financial environment

Analysis of Technology

trends globally to figure

out new avenues for

capabilities growth

Analyzed Service

expansion model for US

Telco utilizing existing

capabilities

Executive Summary

ColocationIn-Building Systems/

Distributed Antennae Systems

Fibre OpticsFTTx - FTTP, FTTN

• High Speed network deployment

• Feasible for SMBs, Hospitals, other public spaces

• 2x-4x improvement in throughput as a result of Macro-offload

• Shift from HD to 4K & popularity of streaming services has

enhanced the demand for fibre

• Cost feasible in densely populated areas, most sustainable

solution, High speed capability, reliability & security

• AT & T planned to rollout Fttp in 100 American cities

• Aimed at only the affluent top 20-25% market which

contributes to the major revenue

• Fibre will be very competitive in high population regions

• High data costs even with the latest tech (4G/LTE)

• Low Speed of deployment due to infrastructure complexities

• Feasible for all but only in long term

• Very high CAPEX despite low cost of fibre

• Economies of scale may lead to consolidation

• Companies from multiple sectors – Telecom, Entertainment,

Internet technology are developing their capabilities in this space

• Cost feasibility is driven by population density

Wi-Max• Medium/High Speed of deployment

• Feasible for SMBs, rural areas, hospitals, other public spaces

• May operate in the unlicensed spectrum or 2.3 Mhz

• Sprint Nextel had acquired the required 2.3 MHz spectrum & also

acquired Clearwire, but later discontinued it in favour of LTE

• Speed capability is only upto 4Mbps, way lesser than LTE

Up-gradationLTE/4G/5G

• Mobile operators, equipment/device manufacturers are pushing

up-gradation to LTE & eventually 5G

• Feasible for SMBs, rural areas, hospitals, other public spaces

• May operate in the unlicensed spectrum or 2.3 Mhz

• 5G is a distant possibility i.e., only after 2020

• Shrinking need for mobile towers due to technological efficiencies,

tower sharing, consolidation & rise of optical fibre adoption

• LTE requires VoLTE to provide voice capability to the network

Forward IntegrationIoT, M2M, VoIP, OTT

• Internet technology companies are integrating backwards to

create a favourable environment for their products & services

thus expanding the market

• Another 10 years for mass adoption of IoT & M2M

• High technical expertise & short technology cycle

• High security & reliability systems required

Geographical

ExpansionEmerging markets

• High mobile & internet penetration rate in emerging economies

• Opportunity to reduce exposure to the saturated market of US

• Poor infrastructure, unfavourable regulatory environment, unstable

government & high rate of inflation growth

Growth Avenues for US Telco

Co-location IoT, VoIP, VoLET & OTT services

FTTx –FTTP, FTTN

Geographical Expansion Forward Integration

Smart Homes

Hospitals

Home /enterprise Smart Cell

Communications Tower

Fibre connections inside the building

Fibre connections inside the building

FTTN/FTTP

Submarine Cables

2G

3G

4G/LTE

5G

Leverage

expertise in ICT property operations to

accelerate the transition

transition

VoLTEservices

Target

Emerging economies in Latin

America, Africa & Asia

Macroeconomic Parameters

• Spectral availability

• Regulatory environment

• Mobile Penetration

• Disposable Income

• Competitive environment

• Tenancy ratio

• Double Tax Avoidance agreement

• Industry revenue growth

• Technology(3G/LTE/4G) adoption

rate

Businesses

Manufacturing

Logistics

Public spaces

Service Expansion

1. Smart cell receiver

installations on rooftops

boost speed 2x-4x times

2. High speed network

deployment

3. Best for SMB’s

Colocation services

1. Need for high quality

content, security &

reliability has triggered

the market share of FTTx

from 22% to 47%

2. Only Sustainable solution

due to lower price points

for customer in densely

populated areas

Optical fiber

1. Expanding to provide

services in the IoT, VoIP

& OTP space

2. Technical competency

which could be acquired

through R&D or through

acquisitions

Forward Integration

Expansion Avenues

Telemo ServicesBBA AfricaN ZoneCapabilities ASA Towers

Wireless Infrastructure

REIT Capability

Wireless Services

New Technologies

Diversified Portfolio

Clients

Alignment With

Strategy

Utilisation Of Existing

US Telco Infra

Cultural Fit

Smooth Integration

Value Creation

Opportunity For New

Products

Revenue Growth

No Experience

No Experience

Global Data, Locationbased services

Hi-speed internet,IOT services

From VOIP to IOT

Consumers, Businesses & Government

Co-Location services, In-building solutions

High Usability in providing Co-location and data

Same Culture

High- similar regulatory environment

Value for both

Interface services package for businesses

Initial increase then steady decline

No Experience

Leasing tower space

Mobile and internet services

3.75 G adoption

Mostly operator services

Majorly consumers & some businesses

Faint Alignment

No Usability

Less Cultural Alliance

Difficult

Intermediate value

B2C services like voice & data

Good Growth & then small decline

Operating Towers

Leasing Tower Space

Hi-speed internet, VOIP

Hi-speed network deployment

From Tower operation to VOIP

Majorly businesses & some consumers

Aligned on co-location and distributed antenna

Some Utility

Less Cultural Alliance

Intermediate

Value for both

Fibre connections & co-location services

Rapid Growth

Expert

Leasing. renting & operating

No Experience

Only Infrastructure services

Majorly infra but some other services

Businesses

Not Aligned

Some Utility

Better Cultural Alignment

Easy(same business)

Value creation is limited

Only In-building solutions

Steady Decline

Technical Evaluation Matrix

List important parameterson the capabilities front and measure

favorability of all the 4 proposed targets

Identify core parameters 1. Alignment with strategy

2. New technologies 3. Utilization of Existing US Telco Infra

4. Value Creation & New products

N Zone Communications, USProvides opportunity to integrate forward in

the home market targeting SMB’s and leveraging its user base to extend colocation

services

Shortlisting Targets

ASA Towers, ArgentinaProvides opportunity to extend US Telco’s

core capability (property operations) in South America and expansion plan

(colocation services) in the US

Favorable Not FavorableHighly Favorable

Assessing Competencies in

alignment with US Telco’s strategic

objectives

Regulatory environment :

Less Restrictive

LTE Spectrum available

Land Rates : $ 2813

Ease Of Doing Business

Rank : 121

No tax avoidance agreement

Technology Environment: Highly Conducive

Technological Adoption Rate: 47% 3G/4G

Technical Synergy: High Synergy

Scope Of Business: Only 5% 4G connections

Mobile traffic data increased 80% in 2015 YOY

Financial Environment:

Conducive

Industry Growth Rate: 5.5%in

2012

Capex as % of revenue: 23%

Operator market is fiercely

competitive

EBIDTA Margins: 31.7%

Macroeconomic Outlook:

Conducive

Fixed(wired) internet

subscriptions: 13.77%

No. Of Smartphones: 40%

Growth Of disposable

Income: 2.10%

Radio/T.V. penetration : 90%

/ 55%

Macroeconomic environment : Not Conducive

Fixed(wired) internet subscriptions: 17.25%

No. of Smartphones: 27.60%

GDP growth : -0.7%

Mobile Subscription: 162.53(per 100 users)

Financial environment : Less

Restrictive

EBITDA Margin : 27.12%

CAPEX as % of revenue: 25.7%

Full Competition

Regulatory environment : Liberal

LTE Spectrum available

Land Rates : $ 3384

Ease Of Doing Business Rank : 36

Double Tax Avoidation Agreement

Technological environment:

Not Conducive

LTE Penetration: 53%

Technical Synergy: Good

LTE Download Speed: 15Mbps

Similar business portfolio

Financial environment : Conducive

EBIDTA Margins: 54%

GDP Share: 2.9%

Capex as % of revenue: 52%

Operator Market has 2 big players

Macro-economic environment :

Highly conducive

Fixed(wired) internet subscriptions:

2%

Growth of disposable income:5.5%

Radio/TV penetration:78% / 86%

Regulatory environment : Restrictive

LTE Spectrum not available

Land Rates : $ 27.288


No Tax avoidance agreement

Technological environment : Conducive

Technological Adoption Rate: 40% traffic on 4G

Technical Synergy: Good

Scope Of Business: Unique subscribers are 60%

Completely different portfolio

ArgentinaPros: Growing inter-country trade

relations

Cons: High inflation rate

Technology Penetration1. Argentina – Low

2. Namibia – Medium

3. Czech – High

4. US – Very High

Assessing Geographical

Expansion in alignment with

US Telco’s strategic objective

Industry Environment 1. Argentina – Conducive

2. US – Conducive

3. Namibia – Unstable

4. Czech – Unstable

Macroeconomic Environment1. Namibia – Growing

2. Argentina – Growing

3. Czech – Flattened

4. US – Flattened

Regulatory Environment1. US – Conducive

2. Czech – Conducive

3. Argentina – Beauracratic

4. Namibia – Restrictive

Shortlisting Targets

Technology environment : Conducive

Cellular M2M connections to increase at

22% CAGR

Technical Synergy: High

4G coverage at 98%

Technology Adoption Rate: 85% 4G

connections by 2020

Regulatory environment : Less

Restrictive

Less LTE Spectrum available

Land Rates : $ 18499


Substantial Tax Benefits

Financial environment : Conducive

Industry EBIDTA Margins: 42.5%

CAPEX as % of revenue : 13.5%

Big operators like Verizon and OTT

players such as Microsoft exist

Macroeconomic Outlook: Conducive

Fixed(wired) internet subscriptions:

27.855%

No. Of Smartphones: 77%

Growth Of disposable Income: 0.10%

Radio/T.V. penetration : 90% / 55%

Geographical Evaluation Matrix

0

100

200

300

400

500

-40.00%

-20.00%

0.00%

20.00%

40.00%

2015 2016P 2017E 2018E 2019E 2020E

EBITDA Margin Revenue (in millions)

0

100

200

300

400

500

34.50%

35.00%

35.50%

2015 2016P 2017E 2018E 2019E 2020EEBITDA Margin Revenue (in millions)

Sensitivity

Analysis

Growth Rate Growth Rate

WA

CC

WA

CC

15.119 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%

8.00% 32.233 36.191 40.809 46.266 52.815 60.819 70.824

9.00% 22.716 25.479 28.636 32.279 36.529 41.552 47.579

10.00% 15.675 17.670 19.915 22.460 25.368 28.724 32.638

11.00% 10.335 11.817 13.463 15.302 17.372 19.718 22.398

12.00% 6.210 7.334 8.570 9.937 11.455 13.152 15.061

13.00% 2.975 3.843 4.790 5.828 6.969 8.231 9.632

14.00% 0.408 1.089 1.827 2.629 3.504 4.463 5.517

700.888 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%

8.00% 885.434 943.948 1014.164 1099.985 1207.261 1345.186 1529.087

9.00% 745.257 784.317 829.888 883.744 948.371 1027.360 1126.096

10.00% 642.423 669.706 700.888 736.866 778.841 828.447 887.975

11.00% 564.215 583.940 606.130 631.280 660.022 693.186 731.878

12.00% 503.033 517.685 533.965 552.161 572.631 595.830 622.343

13.00% 454.066 465.191 477.428 490.954 505.982 522.779 541.675

14.00% 414.123 422.725 432.108 442.385 453.689 466.184 480.067

Financial Synergy Expense Decrease Revenue Increase Efficiency

NZone Communications Inc.

Cost of leasing tower space would significantly come down Wireless service providers are expected to spend around $105 billion during 2015-25

Colocation solutions through in-building systems & high speed network services

ASA Tower, Inc. Sharing of cost efficient practices will decrease the cost involved in leasing space to wireless communications

Rapid growth in 4g connections in Argentina is a value driver

ASA Towers will gain from the expertise of the experienced management team of US Telco

Valuation

Value Weight

DCF 700.888 0.8 560.710

EV/EBITDA 1144 0.2 228.800

Total 789.510

Valuation (in millions)

Value Weight

DCF 15.119 1.00 15.119

Premium 20% 3.023

Total 18.143

Assumptions NZone ASA Towers

WACC10.% as the industry average

in USA11.03% as the industry average in

Argentina

Tax Rate 30.00% given 35.00% current corporate tax

Growth Rate3.00% the long term industry

growth rate2.57% the long term industry

growth rate

Population growth rate 1.70% 1.00%

Operating Expense includes COGS, selling & admin expenses, depreciation/amortization

• Valuation & Reporting format used is in accordance to the

standards prescribed by Uniform Standards of Professional

Appraisal Practice(USPAP)

• EBITDA growth is one of the key parameters in analysing any

business in this Industry. As per the given projections, Nzone

Communications and ASA Tower shows growth in the parameter

and this takes them ahead as the potential targets.

NZone Communications ASA Towers Inc.

Business Appraisal

Integration Heat Map - Key Concerns & Risks

Concerns NZone Communications - US ASA Towers, Inc., Argentina

Changing regulatory & legislative

environment

(1) Liberal regulatory reforms in US would help in smooth integration.

(2) Progressive Federal communications Commission

(1) No double Tax avoidance agreement. (2) Relatively higher LTE

spectrum up for sale by ENACOM.

Economic uncertainty (1) Saturated in mobile smartphone penetration. (2) Disposable

income growth of 2.1%.

(1) High market potential owing to 5% 4G & Fixed wired internet

subscription base of 13.77% (2). Disposable income growth of 0.1%

Improper target identification (1) Inaccurate capability assessment. (2) Short technology cycle in ICT

may render its expertise obsolete.

(1) Scale of operations and technological expertise in colocation

services and high speed network deployment

Inaccurate target valuation (1)Parameters deviating significantly from the industry standards (1) Parameters deviating significantly from the industry standards

Insufficient due diligent process (1) Inaccurate financial reporting. (2) Feasibility of B2B Solutions (3)

Lack of intellectual property in IOT, M2M and other technologies

(1) Ability to secure contracts in Argentina (2) Inaccurate revenue

projections

Failure to effectively integrate (1) Dissimilar products & services offered might pose difficulty in

integration (2) IT Systems integration(1) Varying Financial reporting standards (2) IT systems integration

Risks NZone Communications - US ASA Towers, Inc., Argentina

Achieving cultural fit (1) Difference in employee, managerial and organizational skills due to

business operational differences

(1) Cultural shift for deputed employees (2) Recruitment of cross

culture fit managers

Synergy capture (1) Expanding the scope of services for value creation (2) End-to-end

wireless solutions for SMBs

(1) Leveraging US Telco’s expertise in property operations combined

with ASA’s expertise in Colocation services

Workforce transition (1) Difference in Salesforce management due to varying nature of

services offered (2) Lack of technological expertise

(1) Rightsizing in both organizations (2) Requirement of developing

network in the market

Customer Retention (1) Service gaps due to management perception (2) Pricing strategy(1) In-appropriate consumer perception of a foreign brand (2)

Difference in pricing strategy in developed & developing market

Medium HighLow

Day 30Day 1 Day 60 Day 120 Day 180

Formulating an

integration planCommunicating the

integration plan

Project Prioritisation

Plan & Training

Measuring Success

& Resolving Issues

Continuing The

Momentum

• Define success for the

M & A

• Develop a detailed

integration plan

• Form a separate

integration team

having managers from

both organisations

• Customer Overlap

Analysis

• Synergy Identification

• Effective Communication

to all employees(both

acquirer’s and acquire)

regarding the plan

• Authorized Emails &

townhall meetings are the

most effective tool

• Desk Instructions to each

employee regarding their

KRA’s

• Change Management

measures for employees

• Detailed analysis of

the first project to be

implemented

• Sales Force Training

• Assigning managerial

roles to people from

both organisation to

lead the project

• Detailing of Product &

services to be offered

• Uniform reporting

methods to be put in

place

• Centralised ERP and

SCM modules

implementation

• Measure the success of the

integration plan by the

targets set at the start

• Measure the value created

& synergy levels for both

organisations

• Form a proper mechanism

for dispute redressal

because they are bound to

happen- Evaluate, Mitigate,

Act & Communicate

• Transition of full-time

integration management to

various owners

• Continued measurement of

success through

management

dashboards/reports

• Analysing the financials of

two quarters and planning

ahead

• Uniform IT,HR,Accounting

& resource allocation to be

put in place

• Achieving the full

cooperation of employees

for the future plans

Recommendations – Short Term & Long Term

Thank You.

Particulars (figures in Millions) 2015 2016P 2017E 2018E 2019E 2020E

Revenue 297 336 366 391 407 419

Operating Expense 202 228 249 266 277 285

EBITDA 104 117 128 137 142 147

EBIT 95 108 117 125 130 134

Depreciation/Amortization 9 9 11 12 12 13

Change in NWC 0.8 0.5 0.4 0.4 0.2 0.2

Capital Expenditure 20.8 23.5 25.6 27.4 28.5 29.4

FCF 53.9 60.6 66.9 71.7 74.3 77.2

Discount Factor 0.909 0.826 0.751 0.683 0.621

Present Value of FCF 55.091 55.289 53.869 50.748 47.935

PV of Cash Flows 262.932

Terminal Growth Rate 2.50% 3.00% 3.50%

Terminal Value 655.113 705.331 763.275

PV of Terminal Value 406.774 437.955 473.934

Total Enterprise Value 669.706 700.888 736.866

Industry EBITDA 11 Valuation

Co. EBITDA 104 Value Weight

Enterprise Value 1144 DCF 700.888 0.8 560.710

EV/EBITDA 1144 0.2 228.800

Total 789.510


Revenue 79 97 125 164 207 242


EBITDA 36 42 45 66 87 109

EBIT 14 12 26 31 31 48


Change in NWC 1.5 0.6 0.8 0.9 1 0.8

Capital Expenditure 19 17.5 20.1 27.9 26.9 21.8

FCF 11.02 20.06 15.78 27.28 49.18 71.04

Discount Factor 0.903 0.815 0.736 0.665 0.600




Terminal Value 608.677 656.922 712.887



Industry EBITDA 12.9 Valuation


Enterprise Value 464.4 DCF 520.658 0.8 416.527

EV/EBITDA 464.4 0.2 92.880

Total 509.407

Nzone Financial Analysis BBA AFRICA FINANCIAL ANALYSIS

Appendix I: Financials

TELEMO FINANCIAL ANALYSIS ASA TOWERS FINANCIAL ANALYSIS


Revenue 12 16 23 36 51 82


EBITDA -3 -2 -3 -1 10 19

EBIT -4 -6 -6 -4 1 2


Change in NWC 1.2 0.1 0.3 0.5 0.6 1.2


FCF -6.9 -3.9 -9.5 -11.7 0.35 7.2

Discount Factor 0.901 0.811 0.731 0.658 0.593

Present Value of FCF -3.513 -7.706 -8.548 0.230 4.267

PV of Cash Flows -15.269


Terminal Value 48.200 51.275 54.733




Revenue 421 459 491 511 526 542


EBITDA 177 193 206 214 221 228

EBIT 143 156 167 174 179 184


Change in NWC 0.5 0.2 0.2 0.1 0.1 0.1


FCF 140.93 153.96 164.27 170.64 176.39 182.14

Discount Factor 0.954 0.910 0.868 0.828 0.790




Terminal Value 3794.023 4385.299 5185.506



Industry EBITDA 11 Valuation


Enterprise Value 1947 DCF 4198.351 0.8 3358.681

EV/EBITDA 1947 0.2 389.400

Total 3748.081

Appendix II: Financials

• GSMA – the mobile economy Sub Saharn africa : 2014

• GSMA – the mobile economy North America : 2015

• World Economic forum the ICT report 2015

• GSMA - Country Overview: Argentina - impact of the mobile ecosystem: perspectives and opportunities

• MCT annual report 2015

• Global Telecom Trends for 2017 : A Buddecomm Report

• Nokia Enterprise Systems Report

• U.S. Telecom Industry Stock Outlook - May 2016 : Nasdaq report

• Investment in Czech Republic : 2015 – KPMG

• Uniform Standards of Professional Appraisal Practice(USPAP) guidelines

Appendix III: References