The M&A market in technology, media and telecommunications is stirring back to life after a couple of months of COVID-19 convalescence, and deal advisers are bracing for a future with new priorities.
A major priority for Houlihan Lokey Inc., a global investment bank that advises on M&A and other financial transactions, lies in the telecom space, with products and services that support connectivity getting the most attention.
"Our world is becoming focused on the telecom space," Houlihan Lokey co-President Scott Adelson said in an interview. "It's not just that we think telecom is going to be hot next year ... there's a massive move toward telecommunications in the world as a whole."
Adelson's comments come as Houlihan is in the process of buying MVP Capital Advisors LLC, a boutique banking adviser that since 2000 has focused largely on telecommunications and technology infrastructure transactions, including tower, data center and fiber deals. Though a much smaller firm than Houlihan Lokey, MVP Capital's technology, media and telecommunications advisory team will almost double Houlihan Lokey's TMT group, up to 65 bankers.
"That's going to create a very powerful group with deep, deep sector knowledge in these areas we cover," said Jason Hill, managing director at MVP Capital and co-founder of its telecommunications practice. Hill will co-lead Houlihan Lokey's TMT group following the transaction.
A broader TMT team allows the combined firm to facilitate better cross-sector deals between infrastructure, hardware and software companies looking to provide integrated products and services, Hill said in an interview. Also, Houlihan Lokey's specialization in private equity transactions and its relationships internationally give broader reach to MVP Capital's clients.
For instance, MVP Capital experience in advising cell tower transactions will now be supported by Houlihan Lokey's private equity and international business. Tower operators generate revenue through long-term leases with wireless carriers like AT&T Inc., Verizon Communications Inc. and T-Mobile US Inc.
Tower deals have attracted attention amid the pandemic, as historically low interest rates combined with the outlook on secular growth trends are creating a uniquely strong investment thesis in the tower sector. In particular, wireless carriers are deploying new technology and spectrum bands as they expand their next-generation 5G networks, and new players like DISH Network Corp. are entering the wireless sector. As a result, valuations for tower companies and assets are at a historic high right now, MoffetNathanson tower analyst Nick Del Deo said in an interview.
"Both durability and outlook for the asset class made investors that historically didn't consider towers change that," Del Deo said, noting that while earnings and equity fluctuations have complicated the valuation picture, tower consolidators are now trading around 28x reported EBITDA, where during the years leading up to the 2008 recession they were trading around 22x EBITDA.
While the U.S. tower business is largely mature, with the three biggest tower companies owning about three-quarters of the infrastructure already, there are still smaller deals to be done, which is where MVP Capital's focus on sub-$500 million transactions is helpful. Overseas, there remains greater opportunity for consolidation, and Houlihan Lokey's international expertise will come into play. Houlihan Lokey in 2018 and 2019 served 85 and 79 transactions with international targets, compared to one and three transactions for MVP Capital, respectively.
Outside overarching market dynamics, the pandemic period did not slow down deal activity in the tower space, Hill said. His firm is working on about 10 transactions that began talks before the pandemic. That compares to 14 total deals advised in 2019 and 10 in 2018.
Across TMT, the M&A market has been recovering steadily in May and June after a collapse in March and April, Bain & Co. partner David Lipman said in an interview. His firm consults a wide variety of M&A participants, from financial sponsors to consolidators, and he said in general the market is putting more value on connectivity and communications. It made sense before the pandemic period for a broad-based advising firm to add a telecom specialization, and that strategic value only gained ground during the pandemic, Lipman said.
"There are sectors where the future is less uncertain. If you are a provider of cybersecurity to the cloud and remote communications, you know there is a growth backdrop to your market if not your business," Lipman said.