What merger and acquisition activity can we expect to see in 2024? Comms Business dives into the data and talks to channel leaders to find out more.

In recent years, the Channel has been a hive of merger and acquisition (M&A) activity. From ambitious managed services providers (MSPs) executing a buy-and-build strategy, through to channel veterans exiting their much-loved business so that they can enjoy a well-deserved retirement, the drivers of this activity have been broad and varied.

We’re still in the opening chapters of 2024, but plenty of deals are already on the table despite a slowdown in 2023. New data from PwC indicates that M&A activity in the UK fell by almost a fifth in 2023. The data also revealed that the technology, media and telecommunications (TMT) sector saw the most activity for 2023, whilst the energy, utilities and resources sector saw the highest deal value.

In total, the UK saw 3,628 deals across 2023, compared to 4,362 the previous year, a 17 per cent decline. This was almost triple the rate of decline in global deals volumes of 6 per cent over the same period.

Over the slump

Further analysis from PwC showed a drop in deal volume during the second half of 2023 (H2 2023) of almost 600 deals compared to the first half of the year (H1 2023). The volume of activity seen in H2 2023 is the second lowest in the last five years, next to the first half of 2020 which was affected by a slump in dealmaking early in the pandemic.

Despite this adversity, PwC argues there is a case for cautious optimism as economic conditions stabilise. Lucy Stapleton, head of deals at PwC UK, said, “While the macroeconomic environment is still challenging, overall we are in a much better place than we were a year ago with inflation steadily falling and, while interest rates are still higher than recent times, they have stabilised.”

Stapleton pointed to PwC’s recent survey of UK CEOs that found more than half of them expect to make at least one major acquisition in the next three years, arguing “there is still an appetite for deals”.

She added, “We expect the most robust areas of the market, underpinned by societal megatrends, will continue to drive deal activity such as healthcare whilst the fast pace of developments in AI and net zero will be key drivers for dealmakers.”

Pockets of opportunity

Similarly, a new study from Bain & Company found that the global telecommunications industry’s M&A deal value fell by about 39 per cent in the first three quarters of 2023. The company said this was the second consecutive year of decline after strong growth in 2021.

In Europe, the majority of the deal value continued to be accounted for by in-country scale deals and infrastructure divestments.

Scale M&A value was down 4 per cent year-over-year in the first three quarters of 2023. The proposed Vodafone and Hutchison Group merger, which has a combined enterprise value of about $19 billion, was last year’s biggest scale transaction.

Bain & Company said that Vodafone and Three, which is owned by Hutchison Group, are positioning the deal as a combination of two subscale operators to create a stronger market challenger with more investment resources.

Regulators blocked a merger between the two of the UK’s largest mobile players in 2016, but Vodafone and Three’s leaders hope that their deal might go through.

In addition to macroeconomic and regulatory headwinds, mismatched valuation expectations often kept buyers and sellers from closing telecom deals in 2023, according to Bain & Company’s survey of more than 300 M&A practitioners.

While transaction multiples on infrastructure deals held steady at about 25 times throughout the first three quarters of 2023, infrastructure assets’ trading multiples dropped to 14.7 times, the lowest in five years.

So, even though infrastructure deals again made up more than half of total telecom deal value through the third quarter, the category’s value was down about 50 per cent year-over-year.

Bain & Company said that the M&A environment will likely remain challenging for the foreseeable future. It added that high interest rates are pressuring many telcos to consolidate or carve out assets while adapting their M&A approach: 60 per cent of those surveyed are becoming more selective in the deals they pursue.

As a result, Bain & Company said that this is creating pockets of opportunity for selective bets. These include fibre network consolidation, higher-growth segments attracting deals and regulators becoming more open to consolidation.

Accelerated growth

So, how relevant is this top-level data to the UK’s channel community? Adam Zoldan, founder of Knight Corporate Finance, said PwC’s data reflects his experience over the last year.

He commented, “Whilst we are aware that overall deal volumes have fallen, the ICT sector, particularly in the channel, has remained remarkably robust. This is a result of well-funded private equity backed acquirers retaining a high level of confidence – driven by high levels of recurring revenue in their acquisition targets which bring predictable and consistent cash flows coupled with good organic growth opportunities.”

Zoldan explained that rising interest rates have had a “huge impact” on M&A activity. He said, “Many buyers have seen the interest rates on acquisition debt double over the course of 2023, and this has driven up their acquisition costs and this has been reflected in a softening of valuations.

“There is certainly more stability as the consensus is that interest rates have peaked, and with inflation falling there is indeed cautious optimism that rates could fall over the course of the year which would be great news for the channel.”

For Gary Smith, managing director of Venture Corporate Finance, those market conditions are a significant dynamic, but optimism remains.

He said, “What we are seeing from the small cap TMT market is continued caution to the start of year due to higher interest rates and restrictions on the cost of borrowing across private equity and private equity backed buyers.

“This masks the optimism within the market and, as we continue throughout the year, these borrowing rates are expected to reduce. This will release extra funds and buyer appetite within the market.”

Smith also expects the upcoming general election to have an impact. He said, “With a general election on the horizon, it is another driver for shareholders to exit which will further fuel the market in the third and fourth quarters. We remain optimistic about this year and we expect to see continued consolidation of the TMT sector.”

Matt Parker, CEO of Babble, has been involved in several channel transactions in recent years. That includes Babble’s acquisitions of Midland Comms and Cloudstream Technology Limited’s MSP business.

He said, “PwC’s 2023 M&A report makes for challenging reading, with economic headwinds of last year spooking dealmakers across the UK. The 17 per cent decrease in deals is especially stark when compared to the 6 per cent decrease globally.

“Babble has long been named as one of the UK’s most acquisitive companies. This approach has allowed us to grow at an accelerated rate, whilst also boosting customer satisfaction by providing a larger range of products and services.”

Parker discussed how he grapples with risk when deciding whether to pursue an acquisition. He said, “But M&As come with risk and this risk has been felt more over the past year.

“For example, the type of business we acquire is an SMB where the founder has put in years of hard work to create a strong offering, but the founder is the business’ IP. In good times, M&A always carries a risk of accelerated customer attrition once the deal is closed, but in tougher times, and if you’re not smart in M&A execution, that attrition risk can accelerate even further leaving you heavily exposed.”

Strengthening deals

Looking ahead to the remainder of this year, Knight Corporate Finance’s Zoldan anticipates acquirers will need to put forward competitive bids.

He said, “Over 2024 we expect to see further private equity investment with new entrants and several of the existing buy-and-build platforms swapping investors. We expect more activity from channel vendors following our deals that saw Focus invest in Zest4 and EnableX acquired by Gamma. The highest deal volume will remain in the reseller area – with multiple acquirers competing for the best assets.”

Babble’s Parker expects 2024 to be “tricky to navigate”. He said, “We’re already experiencing geopolitical and economic challenges and a general election will naturally cause further uncertainty. But, M&A brings huge benefits to many stakeholders and the wider British economy, and I expect to see the market start to return to 2021 levels as the year progresses.”

Businesses will also take the time to evaluate whether their existing assets support the direction they want to head in. Parker said, “In this environment, the fundamentals become even more crucial. Leading telcos will reinforce their core businesses by shedding assets that don’t fit long-term growth plans, perhaps selling to unconventional buyers such as private equity.

“As more telcos come under financial pressure, it will create opportunities for competitors to increase scale in their core businesses and make moves in adjacent products and services, especially in fibre and enterprise technology services. Some of these investments might feel uncomfortable right now. Yet even as telcos get more selective in their bets, the most successful ones will stay bold.”

This article appeared in our March 2024 print issue. You can read the magazine in full here.