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Investments by Telcos in Asia-Pacific A Hive of Activity September 2016

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Page 1: Investments by Telcos in Asia-Pacific · acquirers in Japan, Australia, the Philippines, Singapore, Malaysia, and Indonesia. 4. 26% of the deals conducted by Asia-Pacific investors

Investments by Telcos in Asia-Pacific

A Hive of Activity

September 2016

Page 2: Investments by Telcos in Asia-Pacific · acquirers in Japan, Australia, the Philippines, Singapore, Malaysia, and Indonesia. 4. 26% of the deals conducted by Asia-Pacific investors

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Contents

Section Slide Number

Executive Summary 3

Merger & Acquisitions: Some Basics 5

• Drivers and Restraints 6

• Best Practices 8

• Things that Can Go Wrong 9

Investments by Telcos in Asia-Pacific 10

• Investment Deals between April 2014 and September 2016 12

• Heat Map of Asia-Pacific Acquirers in the Past 2.5 years 14

• Key Trends 15

• Telstra’s Investments 18

• Softbank’s Investments 20

• Investment Targets—Profile and Updates 22

Wrap Up 23

The Frost & Sullivan Story 26

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Return to contents

Executive Summary

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Source: Frost & Sullivan

Key Findings

1. Consolidation in the telecommunications industry is still ongoing. However, the number as

well as the size of deals have been decreasing over the years.

2. Overall, most investment deals have been struck within Asia-Pacific, with only a few taking

place outside it. The main acquirers in the past 2.5 years have been Telstra and Softbank,

with deal acquirers mostly in Japan and Australia. Of the deals that took place outside Asia-

Pacific, most targeted companies in the United States, followed by Europe.

3. Within Asia-Pacific, India is a top target for investments. This is due to its tremendous

potential for growth and the fact that it is already at a turning point in its development.

Australia is another top destination. Most deals involved a mobile network operator

acquiring a stake in another company to increase its core competence. eCommerce and

content have been identified as key growth areas in Asia-Pacific. There are still some

mergers & acquisitions ongoing between two mobile network operators. The bulk occurred

before April 2014.

4. Vietnam is starting to open up, with 2015 seeing the first acquisition of a foreign

telecommunications operator by a Vietnamese company and the first time an overseas

investor invested in a Vietnamese telecommunications infrastructure company.

5. Fintech is starting to resonate with investors, mainly because digital services are the future.

As digital services are more likely than not to take place on mobile devices, the mobile

network operator has the advantage of an existing relationship.

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Return to contents

Mergers & Acquisitions: Some Basics

Page 6: Investments by Telcos in Asia-Pacific · acquirers in Japan, Australia, the Philippines, Singapore, Malaysia, and Indonesia. 4. 26% of the deals conducted by Asia-Pacific investors

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Mergers & Acquisitions—Drivers and Restraints

Drivers

1. Potential synergies derived as a result of mergers and acquisitions (M&As) drive M&A activity.

Telecommunication operators increasingly look for synergies, as their services gradually become

utilities and revenue starts to dwindle

a. Through a merger and acquisition deal, telecommunications infrastructure costs are reduced

without limiting network investment. Network sharing is not able to deliver the same quantum of

savings while maintaining control over network and service quality.

b. A combined customer base allows telecommunication operators to reap the benefits of economies

of scale, e.g., reductions of the cost to acquire and retain customers.

2. Ability to acquire core competencies or businesses of the acquired firm as well as enter a new market.

These activities would not ordinarily be immediately possible if not for an M&A deal.

3. Current low valuations coupled with low interest rates and bank willingness to underwrite debt for

acquisitions are also driving mergers and acquisitions throughout the region.

Source: Frost & Sullivan

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Mergers & Acquisitions—Drivers and Restraints (continued)

Restraints

1. Merger and acquisition transactions tend to work at cross purposes with efforts by local regulators to

increase competition by giving out new licenses.

2. Post-merger consolidation takes time and companies tend to shift focus from market activities to

internal rebuilding.

a. On average, it takes 6–12 months to close the deal and then another year for re-branding, 2 years

to rework the sales and marketing channel, and 3 years to consolidate network and IT.

b. Inability or lack of expertise to manage the complexity in the transitioning of their network and IT

services could lead to the telecommunication operator losing market share.

c. Duplicate infrastructure instead of re-architecting service layers could increase OPEX instead of

reducing it.

Source: Frost & Sullivan

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Mergers & Acquisitions—Best Practices

Investors look for an outcome with the following features:

1. Increases revenue: Mobile network operators are focused on increasing average revenue per user

(ARPU) not just per user but per household. This can be done by sharing their network infrastructure

and/or adding layers to their services, e.g., through offering health, IoT, and Big Data services in addition

to core services.

2. Allows entry into a new market: As the barriers for entry into the US market are high, an investor’s

options are to enter the market by acquiring an existing operator, buying spectrum in future auctions, or

signing up to be a mobile virtual network operator (MVNO). Purchasing competitors that are well

established in a particular geography gives the acquirer immediate access to that area. Prime targets

typically feature companies with premium customer satisfaction rates, which translates to less post- deal

churn.

3. Acquires a new core competence: Larger operators try to remain competitive by seeking smaller, often

niche companies with proprietary services or technologies. This is also a quick way to increase non-

organic revenue.

4. Builds presence as an investor: For example, Softbank is increasing its stakes in India to build its

presence as an investor in India.

Key considerations include the following:

1. Outcome of due diligence of the target company

2. Legal and political structures as well as risks within the country in which the target company is operating

3. Post-deal synergies derived would constitute more than half the purchase price. The bulk of expected

synergy is usually derived from network and IT. Source: Frost & Sullivan

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Mergers & Acquisitions—Things that Can Go Wrong

1. Synergies expected did not materialize or it was more difficult/complex than expected, to carry out the

post-deal plan.

2. Differences between shareholders, particularly when it comes to company direction

3. Inability to obtain regulatory approval. Regulatory approval is a key consideration in all M&A deals.

a. It might be easier to obtain approval for the deal if it was conducted overseas. Local deals may be

considered anti-competitive by local regulators.

i. For example, the APT-Ambit merger deal was rejected twice by the Taiwanese regulator NCC in

2015. The regulator deemed the deal a breach of telecom regulations, as sharing of a core

network does not meet the definition of the 4G roaming agreement in place.

ii. Another example is that of the planned merger between Sprint and T-Mobile to turn around

Sprint, which faced local regulatory objections and failed in 2013. This was after Softbank paid

$21.6 billion for a 78% stake in Sprint in 2013. Failing to get regulatory approval, Softbank’s

options were to write off Sprint or overhaul it through an alternate low-cost plan.

b. Where M&A deals have been approved, the local regulator, in some cases, imposes a significant

constraint such as spectrum divestment or network sharing deals.

i. In the case of Far EasTone, NCC imposed 20 conditions on its planned investment in China

Network Systems, including a pledge to invest in digital capacity over 5 years.

ii. In Tanzania, where Viettel invested in 2014, the local law required it as a new

telecommunications operator to list on the exchange.

Source: Frost & Sullivan

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Return to contents

Investments by Telcos in Asia-Pacific

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Notes on Deals Studied

1. The definition of an acquisition as stated in Investopedia is “a corporate action in which a

company buys most, if not all, of the target company's ownership stakes to assume control of the

target firm.”

2. This paper includes deals within Asia-Pacific that involved a telecommunications operator as an

acquirer or an acquired company conducted between April 2014 and September 2016. It does not

include deals that increase existing stakes in a company without changing who controls the

company and deals that are pending completion or did not go through during the period under study.

Sources: Investopedia; Frost & Sullivan

Page 12: Investments by Telcos in Asia-Pacific · acquirers in Japan, Australia, the Philippines, Singapore, Malaysia, and Indonesia. 4. 26% of the deals conducted by Asia-Pacific investors

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Investment Deals between April 2014 and September 2016 77% of all deals were struck within APAC; few outside it

s

>10 deals

3<x<10 deals

x<3 deals n = 92

Source: Frost & Sullivan

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Investment Deals between April 2014 and September 2016 77% of all deals were struck within Asia-Pacific

77% of deals took place in: 1. India

2. Australia

3. New Zealand

4. Indonesia

5. Thailand

6. The Philippines

7. China

>10 deals

3<x<10 deals

x<3 deals n = 71 Source: Frost & Sullivan

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Heat Map of Asia-Pacific Acquirers in the Past 2.5 Years The main acquirers were Telstra and Softbank from Australia and Japan,

respectively

Active acquirers were:

1. Telstra 11 deals

2. Softbank 10 deals

3. Axiata 8 deals

4. PLDT 7 deals >9 deals

5<x<9 deals Source: Frost & Sullivan

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Investments by Telcos in APAC—Key Trends

1. Consolidation in the telecommunications industry is still ongoing. However, the number and size of

deals have been decreasing over the years.

2. Overall, the majority, 77% of all deals were struck within APAC; few took place outside it.

3. The main acquirers in Asia-Pacific in the past 2.5 years were Telstra and Softbank. Together they

account for 30% of the deals conducted within Asia-Pacific

a. Apart from Telstra and Softbank, Axiata and PLDT have also been active in the region, snapping

up 21% of the deals. In total, 51% of deals within Asia-Pacific were closed by Telstra, Softbank,

Axiata, and PLDT.

b. While no deals were recorded in Japan itself, both Japan and Australia housed the acquirers of

44% of deals within Asia-Pacific. In total, 86% of the deals within Asia-Pacific were closed by

acquirers in Japan, Australia, the Philippines, Singapore, Malaysia, and Indonesia.

4. 26% of the deals conducted by Asia-Pacific investors involved acquisitions of companies outside Asia-

Pacific.

a. The majority, 62% of the deals, targeted companies in the United States, followed by 29% in

Europe

b. The most active APAC investors in the past 2.5 years are PLDT, followed by Telstra and then by

Softbank.

Source: Frost & Sullivan

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Investments by Telcos in APAC—Key Trends (continued)

1. Most deals within Asia-Pacific, i.e., 89% of the deals, over the past 2.5 years involved investors from

within Asia-Pacific.

a. Within Asia-Pacific, 75% of deals took place in India, Australia, New Zealand, Indonesia,

Thailand, the Philippines, and China.

b. In India, the main themes by global investors were deals to expand the scope and capabilities of

acquirers in the areas of eCommerce and digital media as well as tower and spectrum sale and

purchases. Approximately 33% of the deals were conducted by investors from outside Asia-

Pacific.

c. Investors inclusive but not limited to Softbank, Singtel, and Taiwan Mobile are confident of India

as an investment target and have invested or are looking to invest in India. Investors

acknowledge that while the competition is intense, the Indian market has tremendous potential to

grow and is already at a turning point in its development. Opportunities abound even at its current

stage.

d. In Australia, almost all deals were domestic, with Telstra accounting for 45% of the deals and

leveraging them to expand its services in key growth areas such as health, enterprise mobility,

Big Data, IoT, and cloud services. A major highlight in 2015 in Australia was the acquisition of

Amcom by Vocus for $650 million, which created the third-largest telecommunications operator

after Telstra and Optus.

2. The remaining 14% of the deals within Asia-Pacific involved investors from outside Asia-Pacific

investing in companies within Asia-Pacific.

a. The investors included European telecommunications operators Vodafone, Telenor, and

Telefónica. Source: Frost & Sullivan

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Investments by Telcos in APAC—Key Trends (continued)

• Overall, the main focus areas for investors in Asia-Pacific include:

o 53% of the deals involved a deal in which a mobile network operator acquired a stake in another

company to increase its core competence; e.g., Softbank in IoT with the recent acquisition of ARM

Holdings in July 2016

65% of the companies acquired focused on eCommerce, content, and cloud services. Almost

half the deals involved acquisition of an eCommerce or content company, as these expertise

areas are believed to be key growth areas in Asia-Pacific. Acquisition of content facilitates

quad play, which reduces churn for mobile network operators.

Only a handful of deals involved companies offering IoT, Big Data, and fintech.

o 18% of the deals involved a merger between two mobile network operators, while another 7%

involved a merger between two fixed network operators. The bulk of the mergers occurred before

April 2014.

o 15% of the deals involved a deal whereby a fixed network operator acquires a stake in another

company to increase its core competence.

o Few deals involved investments in towers and spectrum; they were recorded mainly in India and

the Philippines.

• There were a few firsts for Vietnam in 2015:

o The first acquisition of a foreign telecommunications operator by a Vietnamese company: Viettel, a

Vietnamese military-run mobile operator, acquired Beeline Cambodia.

o The first time an overseas investor invested in a Vietnamese telecommunications infrastructure

company: TIME dotCom invested in CMC Telecom in Vietnam. Source: Frost & Sullivan

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Telstra’s Investments Mainly focused on Australian companies and acquisitions to expand health, cloud, video, and

enterprise mobility solutions

s US Investments

2016 Instart Logic

2015 Elemental

2014 Ooyala

-> to boost video

solutions

Australia Investments

2016 MSC Mobility

2015 Anywhere Healthcare

-> to boost healthcare and

enterprise mobility

2016 Kloud, Readify

2015 Panviva

->to expand cloud service

offerings

UK Investments

2015 Dr. Foster

-> to create a

connected health

care system

China and Taiwan

Investments

2016 Qiniu

2015 Gorilla

Technology

-> to boost cloud and

Big Data offerings

Source: Frost & Sullivan

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Telstra’s Investments (continued) Investments were made through Telstra Ventures

1. Most of Telstra’s deals were focused on Australian companies

2. In the past, its acquisitions targeted investment opportunities in technology companies; e.g., in

eCommerce, eHealth, IoT and fintech.

3. Recent acquisitions aim to expand health, cloud, video, and enterprise mobility solutions throughout

Asia-Pacific, help Telstra increase its coverage of the China market, and drive new business

opportunities.

4. Healthcare acquisitions in 2015 followed Telstra’s launch of the Telstra Health division in Oct. 2014

while enterprise mobility acquisitions help Telstra target the fastest-growing segment with tools that

help its customers drive better business outcomes.

5. Acquisition of cloud companies expands cloud service offerings, such as in professional and managed

services as well as API-based customization and extensions. It would also enhance Telstra’s

consulting capabilities in business technology advisory services.

Source: Frost & Sullivan

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Softbank’s Investments Mainly focused on the United States and India, with key acquisitions in eCommerce and

transportation app companies

s US Investments

2014 Sprint

2014 Legendary

Entertainment

-> to boost content

offerings

India Investments

2014 Ola, Locon

Solutions, Snapdeal

-> to boost eCommerce

offerings

UK Investments

2016 ARM

-> to expand IoT

offerings China and South Korea

Investments

2015 KuaiDi Dache

2015 Coupang

-> to boost eCommerce

offerings

ASEAN Investments

2014 Tokopedia

2014 Grab

-> to boost eCommerce

offerings

Source: Frost & Sullivan

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Softbank’s Investments (continued) Investments were made through Softbank Group Corp.

1. 50% of Softbank’s deals were focused on US and Indian companies.

2. In the past, its acquisitions targeted investment opportunities, which led to its major stakes in Internet

and eCommerce companies.

3. Recent acquisitions in Internet companies support disruptive entrepreneurs who share Softbank’s

vision as they further revolutionize eCommerce.

4. Within the past 2.5 years, Softbank has acquired a mix of regional and local transportation apps such

as Grab Taxi operating across Asia-Pacific, Ola in India, and Didi Kuadi in China. Didi Kuadi is Uber’s

keen competitor in China and secured $3 billion in funding through other investors in 2015 after

Softbank acquired a stake in February 2015. Its valuation is 5x that of Ola, at $15 billion.

5. The acquisition of a movie studio will increase the attractiveness of Softbank’s core service: mobile

phone services. The recent acquisition of Legendary East that had signed a multiyear pact in 2015 to

co-produce movies with China Film Co., the largest film distributor in China, is expected to facilitate

Softbank’s quadplay service offerings.

Source: Frost & Sullivan

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Investment Targets—Profile and Updates

MobiFone

Vietnam

1. Mobifone is a state-owned mobile network operator headquartered in Hanoi. The

Vietnamese government plans to privatize it but was yet to release its plan as of

August 2016.

2. It is the second-largest mobile network operator in Vietnam and has an estimated

brand value of $539 million.

3. Telenor, Comviq, Telstra, and Singtel have since expressed interest to invest in

Mobifone.

PT XL Axiata

Indonesia

1. PT XL Axiata is the second-largest mobile network operator by subscribers,

headquartered in Jakarta.

2. It has an estimated revenue of 21.26 trillion IDR (2015). Earlier, in March 2016, it

sold 2,500 of its broadcast towers to PT Professional Telekomunikasi Indonesia

(Protelindo) for $267.2 million to settle some of its debt.

3. Axiata, which owns 66.4% of PT XL Axiata, is seeking a buyer for 11% of its

shares in PT XL Axiata worth $2.2 billion as of September 2016.

Dialog Axiata Plc.

Sri Lanka

Smart Axiata Co

Cambodia

1. Dialog is the largest mobile network operator in Sri Lanka, headquartered in

Colombo. It has an estimated revenue of $531.2 million (2015).

2. Axiata, which owns 83.3% of Dialog Axiata Plc., is seeking a buyer for 30% of its

shares in Dialog Axiata Plc.

1. Smart is the second-largest mobile network operator in Cambodia, headquartered

in Phnom Penh.

2. Axiata, which owns 95.3% of Smart Axiata Co, is seeking a buyer for 30% of its

shares in Smart Axiata Co. Source: Frost & Sullivan

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Return to contents

Wrap Up

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Key Takeaways

1

Industry consolidation will continue until each market is only

addressed by a single network; telecommunications operators

compete only on customer experience. However, for this scenario

to occur and to bear fruit, a supportive regulatory framework needs

to be put in place by the local regulator to address pricing and

SLA.

2

As telecommunications operators evolve into digital businesses, they

are increasingly investing in digital services companies. Alongside this,

these operators are also starting to invest in fintech, such as to offer

mobile wallets to support digital commerce activities offered to

businesses, as the operators have the advantage of an existing

relationship. This trend rides on eCommerce as a key growth area in

Asia-Pacific.

Source: Frost & Sullivan

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Frost & Sullivan is not responsible for incorrect information supplied to us by manufacturers

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Return to contents

The Frost & Sullivan Story

The Journey to Visionary Innovation

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The Frost & Sullivan Story

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Value Proposition: Future of Your Company & Career Our 4 Services Drive Each Level of Relative Client Value

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Global Perspective 40+ Offices Monitoring for Opportunities and Challenges

Page 30: Investments by Telcos in Asia-Pacific · acquirers in Japan, Australia, the Philippines, Singapore, Malaysia, and Indonesia. 4. 26% of the deals conducted by Asia-Pacific investors

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Industry Convergence Comprehensive Industry Coverage Sparks Innovation Opportunities

Automotive &

Transportation

Aerospace & Defense Measurement &

Instrumentation

Information &

Communication Technologies

Healthcare Environment & Building

Technologies

Energy & Power

Systems

Chemicals, Materials

& Food

Electronics &

Security

Industrial Automation

& Process Control

Automotive

Transportation & Logistics

Consumer

Technologies

Minerals & Mining

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360º Research Perspective Integration of 7 Research Methodologies Provides Visionary Perspective

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Implementation Excellence Leveraging Career Best Practices to Maximize Impact

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Our Blue Ocean Strategy Collaboration, Research and Vision Sparks Innovation