M2M BLOG

THE MVNO ROLL-UP BEGINS NOW!

This is reprinted from the James Brehm and Associates blog with permission.

BY LAWRENCE LATHAM & JAMES BREHM

THE OVERVIEW

Within the next week or so, there will be at least one sizable transaction in the MVNO space, with the amounts dwarfing the recent Axeda acquisition by PTC.  The goal of these transactions is to turn one or more of the MVNOs into an end-to-end M2M solution provider on a global scale.  

What does global scale mean?  Right now, very few companies have global scale.  AT&T and Vodafone have over 17 million connections each.  By comparison the biggest MVNOs have a couple of million connections.  Achieving global scale will require staffing for sales and support in region with local language, which is a very expensive proposition.  The financial taps are opening to make it happen.

Several years ago, the term MVNO meant a company was in the business of selling connectivity and providing SIM cards.  Over the past few years, MVNOs have migrated from simply providing connectivity to offering complete, end-to-end M2M solutions.    Generally speaking, MVNOs currently have better hands-on implementation experience with M2M customers than most mobile network operators (MNOs).  All of the MVNOs we have recently talked to are now looking to scale in a large way to become global M2M solution providers serving the enterprise and OEM community.  The upcoming transactions are another step in realizing that vision.

From a financial community perspective, the recent activity plus these imminent transactions shows how attractive the M2M/IoT space currently is.  We recently visited with Michael Lenoce, the Managing Director for Technology & Communications Investment Banking at Media Venture Partners about Mergers, Acquisitions, and Private Equity investments.  Here are some of his takeaways: 

“M&A activity in the M2M Communications sector has accelerated significantly over the past 6 months, and interest by VC and Private Equity firms has intensified, where there are a number who are actively pursuing investments in the space instead of waiting for sell-side processes – the  prevailing view among investors is that M2M will be the next big opportunity for growth and want to invest while it’s still in the early innings.”  
“Valuations over the past year have increased significantly, transitioning from 9 to 11x EBITDA multiples to mid to high teens or increasingly revenue multiples that are similar to pure SaaS valuations.”
“Over the past few months there has been a lot of activity by traditional MVNOs who are either seeking to raise capital or pursue an outright sale – investors are viewing these companies as great platforms to add additional applications/solutions targeting specific industry verticals and cross sell into their existing MVNO customer base.”

These transactions highlight the value that the MVNOs have cultivated with customers and the financial community is positively recognizing it.  Is the global scale strategy going to be a winner? 

OUR TAKES

LAWRENCE: WHY MVNOS WILL WIN:

1)     Global Enterprises will look for solutions with integrated network choices rather than cobbling together global coverage by working directly with a variety of regional network operators.

2)     Global Enterprises won’t entrust their global M2M business, their business’s mission critical “central nervous system”, to a single network provider. 

3)     MVNOs with complete solutions will be more agile, responsive, and in tune to their enterprise customer’s needs.

JAMES: WHY MVNOS WILL STRUGGLE WITH THE GLOBAL SCALE STRATEGY:

1)     What kind of scale are we talking about?  If you combined any two of the top MVNOs, they still would not have the installed connection base of any one of the top 10 global MNOs (ie China Mobile, AT&T, Vodafone, etc).  Will Global 2000 businesses look at even the biggest MVNOs as “big enough”?  MNOs are huge multibillion dollar enterprises.   AT&T for example has revenues of $128.752 billion in 2013.  Large companies like to do business with companies their own size for financial, legal, and ego reasons.

2)     For MVNOs to get global reach, it will require global staffing for sales and support, which is a very expensive proposition. 

3)     MNOs such as AT&T and Vodafone already offer global coverage and global SIMs to enterprises and OEMs.  Global solutions already exist.

4)     By definition MNOs own and control their own networks.  By definition MVNOs do not.  MVNOs will always have to react to MNOs. 

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IMHO, James'w point about the size of MVNOs points out a different issue.  In the pre-Internet days, IBM was proud of its nationwide SNA network, that from a phone company standpoint was smaller than a large central office.  These days the Internet makes the core scale. An MVNO that is strictly built on connectivity and does not have value in its core, is easily replaceable.