US Telco Ltd.

Case Submission
4th August 2016

Agenda
Executive Summary
Overview of Mobile Infrastructure Industry
Growth Opportunity
Target Evaluation
Integration Risks
Recommendations
Appendix

Executive
Summary

Industry Overview

Growth Opportunity

Target Evaluation

Integration Risks

Recommendations

Executive Summary
US Telco Should look for opportunities regarding expansion in 4G LTE domain. This domain offers
best growth avenue for the company amidst impending saturation in mobile telecom industry.
Therefore, in order to grow inorganically in this domain, the company should look to acquire firms
which provide it the opportunity to expand in this direction. As per our analysis these two firms
are NZone Communications, Inc. and TeleMo Networks Limited.
To identify key growth avenues for US Telco in Mobile Infrastructure Industry.

Strategic Objectives

Analysis

Recommendations

suggest ways to grow inorganically especially through acquisition of suitable

companies.

Perform an overview analysis of the Mobile Infrastructure Industry and

identify key areas which can boos the growth of the company.
Perform an evaluation of target firms to identify their suitability for merger with
US Telco.
Based on the evaluation or target firms identify the two most suitable merger
targets for US Telco. Based on the analysis recommend suitable acquisition
price for the target firms.
Recommend post merger steps including identifying key integration risks and
ways to mitigate them.

Executive
Summary

Industry Overview

Growth Opportunity

Target Evaluation

Integration Risks

Recommendations

Mobile Infrastructure Industry

Mobile infrastructure industry constitutes firms
equipment and services to wireless service providers,
television broadcast companies, wireless data
government agencies and municipalities, and tenants
other industries.

providing
radio and
providers,
in various

The infrastructure maybe owned by the wireless service providers

themselves or maybe owned by other firms which lease out the
communication sites to the service providers.
Communication Sites primarily classified as Macrocell Sites
(primarily tower based) and microcell (Pico cell, Wi-Fi, DAS etc.)
Key Points:
In 2016 quarter 1 the global macrocell infrastructure market
totaled $10 billion, declining by 18% quarter-over-quarter basis.
The mobile infrastructure market is also down 8 percent on a
year-over-year basis.

Revenue Source:
Multiple tenants lease vertical space on
the tower for their communications
equipment.
Rental charges are typically based on:
Property location
Leased vertical square footage
on the tower
Weight placed on tower from
transmission equipment and
backhaul solutions

To keep up with the rapid growth in wireless data usage, carriers need to invest
in networks. However, this investment has seen a decline in recent years.

Executive
Summary

Industry Overview

Growth Opportunity

Target Evaluation

Integration Risks

Recommendations

4G Long-Term Evolution (LTE)

LTE is a 4G wireless communications standard developed by the 3rd
Generation Partnership Project (3GPP) that's designed to provide up
to 10x the speeds of 3G networks for mobile devices.
The rollout of 4G in the U.S. is expected to take the better part of a
decade and is expected to result in long-term, solid demand for
communications towers.
4G connections are expected to grow at a 28% compound annual
growth rate between 2015-2020, while 2G and 3G connections are
projected to decline.
Source: Cisco Visual Networking Index report

To keep up with the rapid growth in wireless data usage, carriers

need to invest in networks.

Growing adaption of 4G wireless usage will result in the need for

more cell sites.

Network designed for initial

voice and 3G services

As Data Usage rises,

existing network proves
deficient. Therefore, new
cell sites are required for
seamless usage.

Executive
Summary

Industry Overview

Growth Opportunity

To meet the mobile data demand, wireless carriers will continue to

employ an integrated approach to their networks, increasing demand
for towers.
An aspect of this integrated approach is installation of 4G LTE
equipment such as antenna in the existing mobile infrastructure sites.
As a result of the network up gradation, site leasing rates are
expected to increase by and average of around 25%. This increase in
the site lease rates can be expected to be a major driver of
companys revenue growth.

Target Evaluation

As per Cisco Visual Networking Index report, around 75% of the data
growth would be served by macro cells, predominately Cell Towers.
Therefore, macro site network infrastructure, is expected to grow at a
50 percent cumulative average growth rate over the next five-year
period, proving to be a key profit driver for the company.

New Cell Cites

4G LTE As
Growth
Driver

Source: American Tower Corp.

Increased data
usage will present
tremendous
opportunity for the
company to
expand its
network.

Recommendations

Existing mobile infrastructure is incapable of meeting the demands of

mobile data and entertainment.

Lease Rates

Mobile data traffic is expected to grow

at a 53 percent compound annual
growth rate (CAGR) from 2015 to
2020. By 2020, it will represent 15
percent of global IP traffic.

Integration Risks

Mobile Network
Usage

Voice Over LTE

(VoLTE)

Voice service is currently delivered mainly

over 2G and 3G networks while data is
transmitted using 4G/LTE networks.
Carriers are deploying voice over LTE or
VoLTE to move voice transmission to
4G/LTE.

VoLTE Adoption Requires More Towers. For example, moving from a

network designed for data-only (i.e. no voice support at all) to VoLTE on
700 MHz spectrum could require ~20% more cell sites.
Thus, adaption of VoLTE provides a significant opportunity for the
company to shore up its growth.

Executive
Summary

Industry Overview

Growth Opportunity

Target Evaluation

Recommendations

Integration Risks

Target Evaluation
In order to decide which of the preliminary targets are the most attractive, we evaluate each of them holistically. First,
we have computed the Total Net Present Value (NPV) of each of the firms using Discounted Cash Flow and the
EBITDA Multiple as shown below*:
Total Net Present Value (NPV)#
S. No.

Preliminary Target

Using discounted cash flow (in $

million)

Using EBITDA Multiple (in $

million)

NZone Communications, Inc.

1,693.7

5,360.5

ASA Towers, Inc.

-174.1

57.1

BBA Africa Limited

520.9

2,492.2

TeleMo Networks Limited

3,572.9

8,765.8

* Refer to Appendix 2 and 3 for details of the calculation of NPV

# Final numbers shown are calculated after multiplying by the deal multiples

Using both the methods, we can see that the Net Present Value (NPV) is highest for the following:
NZone Communications, Inc.
TeleMo Networks Limited
Therefore, we will next use qualitative analysis to confirm whether NZone Communications and TeleMo Networks are the
most attractive targets.

Executive
Summary

Industry Overview

Growth Opportunity

NZone Communications, Inc.

Target Evaluation

Integration Risks

Recommendations

TeleMo Networks Limited

NZone Communications has a Net Present Value

(NPV) of $301.4 million*.

TeleMo Networks Limited has a Net Present Value

(NPV) of $635.7 billion*.

It is a mid-sized firm with moderately high Y-O-Y

revenue growth potential (between 3% & 13%).

TeleMo Networks is in a region (Czech Republic)

characterized by a low Telecom penetration rate
(75%), which offers scope for aggressive expansion.

Very high incentive to operate in the United States

because of the strong regulatory environment and
high legal protection.

It operates in a region (Czech Republic) that has a

moderate competitive intensity and a good regulatory
environment.

Due to the stringent regulatory environment prevalent

in the European Union (EU), the spread of 4G and
other services is limited, offering high scope for
growth. Therefore, TeleMo Networks expertise in
building, renting, operating, and managing telecom
towers would be very valuable to US Telco.

As the wireless industry continues to mature, future

wireless growth will increasingly depend on the
carriers' ability to offer innovative data services to
customers. Nzones high-speed Internet and valueadded services that support wireless connections for
the Internet of Things (IoT) would accurately suit US
Telcos need.

For NZone, we used the discounted cash flow method to arrive at the
buying price.
Price = NPV x avg. deal multiple = $301.4M x 5.62

For TeleMo Networks, we used the discounted cash flow method to

arrive at the buying price.
Price = NPV x avg. deal multiple = $635.7M x 5.62

Recommended buying price = $1,693.7 million

Recommended buying price = $3,572.9 million

* Refer to Appendix 2 and 3 for details of the calculation of NPV

Executive
Summary

Industry Overview

Growth Opportunity

Target Evaluation

Integration Risks

Recommendations

Key Integration Risks

Key integration risks and considerations that US Telco will have to consider to integrate
successfully with the chosen target

Loss of Key people : The new integrations might change the employment value-propositions
thereby forcing employees to look for other avenues

Organizational and Cultural Flashpoint Risks : This is an important point in context with the
merger with TeleMo Networks Limited as it is Czech based and might have a different
organizational and/or local culture to US Telco

Business Stabilization and Continuity Risks : It is important that US Telco is able to steer the
newly integrated companies in the direction that it wants to so as to meet its long-term business
strategy of providing customized colocation solutions

High Competitive Intensity and High Regulatory Environment in the US market : The company will
have to be extra cautious as it is further expanding its base in the US market which is already very
saturated

Executive
Summary

Industry Overview

Growth Opportunity

Target Evaluation

Integration Risks

Recommendations

Recommendations
We have listed the short term and long term recommendations that US Telco could
implement to ensure a facilitated, structured, and best-in-class Post-Merger Integration.
Short term
recommendations
(30 days)

Based on the target evaluations performed by Deloitte, US Telco should pitch the deal to acquire
NZone Communications, Inc. and TeleMo Networks Limited at the prices quoted.

The post-merger Integration should be chaired at the CEO level along with integration leaders to
ensure quick decision-making along the merger processes.

Invest in 4G LTE networks starting with the United States and eventually move to other regions
where US Telco has operations.

Identify key differences and similarities between US Telco and the acquired companies in terms of
company culture and decision making process to determine the challenges the company might
face.

Long term
recommendations
(180 days)

Identify key performers that company needs to retain and employees company needs to let go.

US Telco should aquire more cell sites since the growing adaption of 4G wireless usage will result in
the need for more cell sites.

Build the requisite technologies, and hire employees who possess the experience and skills
necessary to deploy 4G LTE technology.

Conduct integration workshops for employees on regular basis which will ensure that the employees
of both parent and acquired companies perform in an integrated environment with shared values.

Perform regular reviews (every two months in first year and every quarter for next two years) of
post-merger business performance for key performance indicators.

Appendix 1
Assumptions made
During the course of our analysis, we have made the following assumptions:

Weighted Average Cost of Capital (WACC of 10) and Tax Rate (30%) applicable to US Telco Limited
will also apply to all the other companies listed in the case

The deal multipliers used in our calculation are obtained by taking the average of the deal multiples
listed in Exhibit F Recent Deal Multiples in the Industry in the case.

Appendix 2 NPV calculation using DCF

Appendix 3 NPV calculation using EBITDA Multiples