A recession won’t stop telecom M&A in 2023

It felt like 2022 was full of deal talk. Whether it was AT&T spinning off WarnerMedia, Lumen Technologies wrapping its ILEC divestiture and selling its EMEA business, or any of the seemingly endless number of private-equity backed telecom acquisitions, the year was positively buzzing. Nicole Perez, a partner at Texas-based law firm Baker Botts, tipped 2023 to be even busier in terms of M&A.

Baker Botts has a prominent technology, media and telecommunications practice, having previously represented AT&T when it sold its colocation assets to Brookfield Infrastructure for $1.1 billion in 2018. Perez, who joined the firm in early 2020 and works out of the company’s New York office, is one of the firm’s team of more than 200 technology lawyers. She helped represent GCI Liberty in the operator’s multi-billion-dollar merger with Liberty Broadband in 2020 and Liberty Latin America during its acquisition of Telefonica’s wireless operations in Costa Rica.

In an interview with Fierce, Perez shed some light on how she expects the deal landscape to shift in 2023 and who the potential movers and shakers will be.

Fierce Telecom (FT): There were some interesting telecom M&A and asset deals in 2022. Did anything stand out to you this year from a legal perspective?

Nicole Perez (NP): In 2022, TMT deal volumes readjusted to be more comparable to pre-pandemic levels. Going forward, from a regulatory perspective, the passing of the Bipartisan Infrastructure Law and the Inflation Reduction Act will spur a lot of telecom deals despite a potential recession and other economic headwinds.

In Latin America, where we also advise on substantial telecom deals, regulators are working towards clarifying rules for the use of non-licensed spectrum, which is providing investors with more certainty.

FT: Do you have any general predictions for the M&A landscape in 2023? What factors makes you think there will be more or less M&A in the coming year?

NP: Economists are predicting the U.S. will fall into a recession in 2023—if we aren’t in a recession already. That said, there will still be demand for broadband and communication technologies domestically and digital infrastructure is somewhat recession proof, so I expect the industry will see modest deal growth next year, compared to 2022.

There is also ample room for growth in developing markets such as Latin America and the Caribbean, where companies are increasingly focused on mobile and broadband services.

FT: Are you expecting more deals in the cable or fiber space? What factors will drive these?

NP: In the U.S., the Bipartisan Infrastructure Law and the Inflation Reduction Act, will create more funding opportunities for telecom infrastructure. Companies and infrastructure investors will be eyeing opportunities to invest in broadband services, be it through public-private partnerships, joint ventures or M&A.

Being that the National Telecommunications and Information Administration’s guidelines call for prioritizing fiber when possible, we also might see more emphasis on fiber deals. 

FT: Are you expecting rollups of private equity-owned fiber companies to begin in 2023 or do you think this will happen later?

NP: It depends on how much market volatility remains, but given the high demand for connectivity around the world, we could see these types of deals in 2023. With private equity funds taking telecom companies private, add-on acquisitions would be a part of the strategy to grow these portfolio companies in order to exit them at a healthy premium a few years later when the stock market stabilizes.

FT: Who will be the key buyers?

NP: The interest rate increases have made financing deals significantly more expensive. That has made it harder for private-equity firms to acquire assets at attractive valuations, but we do expect the take-private deals in this space to continue into next year.

Strategics with ample cash-at-hand will be winners in the current economic climate as they seek opportunistic investments and to expand their market share in certain geographies that are ripe for growth, such as Latin America and the Caribbean.

FT: What legal questions hang over telecom M&A deals? Can you comment on what you expect the federal regulatory environment to be like in 2023?

NP: Most regulatory issues impacting M&A will be related to increasing antitrust scrutiny, but the down market incentivizes divestment of non-core assets anyway, so this won’t be significant barrier to deals.

Also, at least in the U.S., we could see some positive effects stemming from the Bipartisan Infrastructure Law and the Inflation Reduction Act, which will create more investing opportunities for telecom infrastructure.

FT: Any last thoughts or insights?

NP: Once the stock market stabilizes, we will see a lot of the telecom companies that are being taken private start to relist.