Telecom valuations, the prices that buyers will pay for telecom network operators, have risen dramatically over the last five years, said Scott Soden, managing principal at Alpina Capital, in a session about mergers and acquisitions (M&A) at the RTIME conference in San Diego yesterday.

Alpina counsels network operators and other telecom infrastructure companies such as tower companies on mergers and acquisitions.

Valuations for incumbent local exchange carriers (ILECs) are now in the range of eight to ten times EBITDA, which is a measure of cash flow, Soden said.

In comparison, valuations five years ago were in the range of five times EBITDA, he said.

He cautioned, though, that valuations will be lower for companies that have not upgraded their network infrastructure.

The increase in valuations has been driven, in large part, by increased government funding that has become available for broadband deployments, said Donald L. Herman, Jr., principal of Herman & Whiteaker, a law firm that specializes in telecom M&A

He cautioned, however, that valuations are coming down as interest rates go up.

Beyond Telecom Valuations

RTIME is organized by NTCA—The Rural Broadband Association, which represents small rural ILECs. The M&A session was part of a track aimed at rural ILEC board members, and Soden advised them to have discussions about what they might want from a merger or acquisition, even if they aren’t seriously considering either of those options at this time.

In today’s market, Soden might come to a rural telco with a potential deal from a client interested in either buying the telco or being sold to the telco. But if the board hasn’t discussed either of those possibilities and replies that it doesn’t plan to meet for six weeks, “you’ve lost out,” Soden said.

Pursuing an acquisition as either a buyer or seller is not an easy process, however, cautioned Herman.

A key responsibility of lawyers involved in a deal is due diligence, the process of ensuring that each side has accurately represented all elements about their business, and as Herman put it, “Not a single person on either side likes due diligence. . . It takes a long time and it’s very cumbersome.”

A typical deal takes between six to nine months from start to finish, said Soden.

Other takeaways from the session:

  • Laws in some states make it very difficult for a cooperative to be in a merger or to be acquired. In other states, however, cooperative-to-cooperative mergers are tax-free and may be the easiest to accomplish.
  • The FCC must approve nearly all telecom M&A but usually does so quickly unless foreign ownership is involved.
  • Large network operators have become very rigid in the terms they insist on when they acquire other operators.

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