Fitch: Event Risk Limits LBO Potential for U.S. Telecom Industry

Fitch Ratings predicts that future private equity interest will be very limited in the U.S. telecommunications industry particularly related to leveraged buyout (LBO) strategies, as discussed in a report published today. Fitch believes the event risk with any LBO strategy is too high compared to other industries, and this will depress activity in the telecommunications sector by requiring a higher investment return threshold.
 
Opportunities to generate the necessary investment returns that private equity desires are limited, given the significant consolidation in the sector over the past five years. Consolidation has limited the number of strategic incumbent buyers who have the financial and operational flexibility with regard to an exit strategy. Historically, the time horizon for the successful conclusion of an exit strategy in the telecommunications industry is more than double those of other industry sectors, with lengths of 7-8 years not uncommon. Consolidation has also increased the risks associated with the regulatory approval process for any ownership review, and risk is also in several pending policy reforms that could have a material effect on business plans and financial prospects.

The report also notes that capital spending and investment requirements, especially within the wireless segment, remain high, reflecting the technological obsolescence present within the industry.

‘Private equity investors have had mixed success in the telecommunications industry over the past five years, which has led to greater caution in their outlook for the industry,’ said Michael Weaver, Managing Director, Fitch Telecom and Cable team. ‘Recent industry developments seem to indicate that private equity sees better returns in other industries.’

Fitch also notes that when companies have considered strategic alternatives, they have chosen to unlock shareholder value themselves through debt-financed special dividends or large share repurchases as opposed to selling to private equity.

The full report ‘U.S. Telecom LBO Potential Limited Due to Industry Event Risk’ can be found on the Fitch Ratings web site at www.fitchratings.com. The report provides an evaluation of key factors that would influence private equity LBO interest in the telecommunications industry, and also revisits some of the most recent efforts by these investors. Fitch’s 2007 outlook report for the U.S. telecom and cable industries can also be found on the web site.

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