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Investec exec: TMT sector to brace for M&A windfall in 2018

? TMT to benefit from Brexit slowdown in consumer-related sectors

? Strong increase in public-to-private transactions

? Supply and demand imbalance throughout the TMT sector

With €112 billion in European exit value, 2017 marks the fourth consecutive year private equity exits exceeded the €100 billion mark, according to recent data from the CMBOR at Imperial College Business School, sponsored by Equistone and Investec. Regional and global factors mean that the telecoms, media and technology sector, which accounted for 15% of this value, is set to benefit from a shift in interest toward high-growth, tech-enabled segments.

S&P Global Market Intelligence spoke with Christian Hess, head of the financial sponsor transaction group at international specialist banking and asset management group Investec, to discuss the private equity outlook for the TMT sector in the year ahead.

S&P Global Market Intelligence: What is your outlook for the TMT private equity landscape in the year ahead, both globally and for the European market?

SNL ImageChristian Hess, head of the financial sponsor transaction group at Investec
Source: Investec

Christian Hess: What everyone wants going forward and really this is no different to the past three decades of private equity — is to be exposed to the high-growth areas, particularly the tech-enabled platforms that can easily expand internationally with a differentiated product which can be doubled or trebled in size. You increasingly see more of these prospects within the media and tech side of the TMT industry, rather than in telecoms, but overall, this will continue to be a highly targeted sector.

Are you seeing any signs of a slowdown in private equity activity in Britain in the run-up to Brexit?

Any slowdown will be more pronounced in other areas such as the consumer-related sectors, where it is more challenging from a U.K. perspective to price new deals over a four- or five-year period. If anything, what that does is put even more focus on the high-growth sectors so I expect the shift in volume from some sectors to others to ultimately benefit the TMT space.

Are there any particular deal drivers in private equity that stood out in the TMT sectors during the past year?

We have seen a strong increase in public-to-private transactions. This is one area which has driven deal volumes in the last 18 months. Within that there have been some sectors which were particularly sought after, such as the payments space.

As the corporates get bigger and become more international, which is something we have seen happen over the past decade, it increases opportunity for buyout funds. This is because as these group gets bigger, it increases the scope for private equity acquisitions of divisions or specific units within the company.

SNL Image

There have been a number of ambitious transactions announced in the TMT space, including AT&T Inc. and Time Warner Inc.'s $85 billion deal and Walt Disney Co.'s $52.4 billion acquisition of 21st Century Fox Inc. assets. Is this industry, particularly in the traditional media segment, now strategic buyer territory or will private equity still have a role to play going forward?

For example this year, private equity firm, BC Partners, purchased German managed hosting provider PlusServer from GoDaddy for $459 million. The asset was part of Host Europe Group which GoDaddy Inc. had acquired the prior year but needed to be divested for regulatory reasons. That opportunity would not have arisen otherwise for private equity so I would say larger corporates yield more opportunities from a buyout perspective.

How much more pronounced has the problem of too much cash chasing too few deals been this year compared to previous years?

This has been a recurring trend in the previous four years that has manifested itself even more profoundly this year. There is a supply and demand imbalance throughout the TMT sector that has been exacerbated by a shift of resources away from medium growth telecoms opportunities to higher growth technology-enabled opportunities.

As a result, when it comes to Europe-based assets across the TMT space, we have seen more non-European bidders come to the fore and pay very high prices. One key example is the £2.4 billion sale of patent management services company, CPA Global, to Los Angeles-based buyout group, Leonard Green Partners.

Has the telecoms industry fallen entirely out of favor with private equity investors? If so, will this be reversed?

It is really a question of available targets. A lot of telecoms opportunities have already been acted upon and there is now much larger available of slightly smaller, but even higher-growth tech-related areas to pursue.