The number of telecom service provider mergers and acquisitions (M&A) has been decreasing, but valuations are holding, according to a new report from CoBank Knowledge Exchange.
That’s good news for service providers, considering that the amount that buyers have been paying for providers has increased substantially in recent years.
According to the report, private market acquisitions generally are being made at valuations based on an EBITDA multiplier in the high teens to low 20s.
Private market valuations remain higher than for publicly traded providers, the report notes.
One key reason is that “many smaller rural communications providers offer service in less competitive markets and typically have high brand equity within the community,” author Jeff Johnston wrote. In addition, “private communications providers typically have attractive growth opportunities as they expand into unserved and underserved markets, often with financial support from state and federal government agencies.”
It was dynamics such as these that drew more investment firms into telecom and helped drive valuations higher, and those dynamics haven’t changed.
Why Fewer Deals?
As for why the number of mergers and acquisitions has decreased, Johnston cites rising interest rates, which have created economic uncertainty, making buyers more cautious. He also cites rising labor and equipment costs, which may increase the amount of time between when an investor buys a company and when the investor sells the company. The latter happens after the investor has put money into the company to generate growth so that the company can be sold at a profit.
“These issues have likely pushed out planned sale dates, which also influences how quickly some institutional owners can turn over their portfolio with new acquisitions,” the report says.
Johnston isn’t overly concerned about the downtown in deal volume, however.
“We expect transaction volume in the communications M&A market to pick up once the economy is more certain and companies are able to execute their plans with greater precision,” he said in a press release about the report. “The reality is that market consolidation still has a long way to go, especially in unserved and underserved markets.”
