Mobile network sharing as a route to in-market

consolidation in the telecoms market

July 2014
Michael Minzlaff

Mobile network operators (MNOs) have publicly supported being able to merge with other businesses in the
same country. Scale is critical if MNOs are to compete for 4G licences and roll out networks and services in line
with those of their competitors. At the same time, operators are under pressure to reduce costs in order to
address the margin impact of flat or declining revenue. This article argues that under certain conditions, network
sharing can be an attractive alternative to M&A, achieving a large proportion of the same cost benefits
(synergies), typically with lower regulatory hurdles and the opportunity for a gradual step-by-step approach as
opposed to an all-or-nothing transaction.

In-market M&A is expensive and time consuming, and success

is uncertain
M&A deals are constructed on the basis of cost synergies and market repair. The recent approval of Telefnicas
acquisition of E-Plus notwithstanding, the European Commissions concerns and those of national regulators
regarding market synergies are well documented. In Ireland, the Commission mandated strict remedies that
significantly curtailed the potential size of any market synergies. Recent press reporting (for example, in the
Financial Times) suggested significant opposition from national regulators to remedies that were perceived to be
too lenient. The experience of rising retail prices as a result of recent acquisitions will still be fresh in the minds
1
of national regulators.

Moreover, our experience has shown that while in-country M&A has led to improved profit margins for the
2
merged business, this has, in most cases, come at the price of a loss of market share. Finally, it stands to reason
that in the case of Three Irelands acquisition of Telefnica Ireland, the remedies will increase mobile price
pressure by enabling cable operator UPC Communications Ireland to enter with converged multi-play offers
under a fixed-rate capacity MVNO model.

In summary, significant uncertainty and questions remain, and operators will need to carefully assess the
arguments for and against M&A compared to those of network sharing.

Network sharing offers a lower-risk route to cost synergy

realisation
Network synergies account for a large share of the total value of recent M&A deals in the telecoms market (see
Figure 1). In the example of Telefnicas just-approved acquisition of E-Plus, network synergies are estimated
at a net present value (NPV) of approximately EUR3 billion and account for 68% of total cost synergies (55% of
overall synergies).

1
For more information, see Analysys Masons Mobile M&A in Western Europe may help to ease pressure on mobile retail
revenue.
2
For more information, see Analysys Masons Mobile in-market consolidation in Western Europe: impact of recent
mergers on margins and market share.

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Figure 1: Synergy value analysis for the TelefnicaE-Plus merger [Source: Telefnica, 2014]

5
NPV (EUR billion)

Network
4

0 Network

Revenue
Opex (total)

Capex

Total
Integration costs

Operating (total)
Distribution

administrative expenses
Selling, general and

Network sharing can afford operators many of the same cost synergies as in-market M&A (see Figure 2) deep
network sharing, based on a NetCo model and transferring existing 2G/3G network assets into the joint venture
(JV), enables the JV to consolidate sites to a single grid, share backhaul, transfer and consolidate network
operation and maintenance activities, and optimise the pace of consolidation, equipment refreshes and new
deployments (for example, single visit, SRAN).

Figure 2: Key sources of network cost synergies [Source: Analysys Mason, 2014]

Depth of sharing Examples

Passive Shared sites, towers, cabinets, power, air conditioning

3
Active Shared radio electronics (amplifiers, cards), backhaul, antennas
Shared core network elements

4
Spectrum Spectrum pooling

Consolidation Golden grid site consolidation

Single visit deployment and upgrades (for example, SRAN)
Shared operation
Joint maintenance

Network sharing deals have been subjected to much less onerous regulatory and competition reviews and
conditions than in-market consolidation deals. The participating operators continue to compete for customers in
the retail and wholesale markets. A wave of network outsourcing has convinced regulators that networks and
services can increasingly be seen as separate. Customers benefit from improved coverage, in particular in rural
areas.

3
Shared antennas are contingent upon spectrum adjacency and radio optimisation constraints.
4
Contingent upon spectrum adjacency.

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In deep network sharing agreements, the complexity of unwinding the agreement and (closely intertwined)
networks should that ever become necessary rises exponentially. Network sharing deals do not prevent
subsequent acquisitions by a third party (for example, Three Irelands acquisition of Telefnica Ireland), but
they increase the barriers, while also reducing the pressure for the sharing partners to merge.

Deep network sharing agreements active sharing, NetCo, consolidation are a viable route to realising a
significant proportion of the cost synergies normally associated with in-market M&A. The complexity of
sharing agreements and the implications on the operators subsequent M&A option space require careful
assessment by board-level executives.

Analysys Mason has a strong track record advising mobile operators, regulators, and financial
institutions worldwide, building on our deep commercial and technical expertise. We support clients in
assessing, valuing, structuring and implementing network sharing agreements between mobile operators
as an alternative to in-market consolidation, to realise cost synergies, as joint bid vehicle in next-
generation spectrum auctions, and in shaping appropriate regulatory frameworks.

Find out more about our work on network sharing with mobile operators and regulators.

Analysys Mason Limited 2014 July 2014