Spotlight 2011: Telecom slowdown

The spike in telecom deals during 2010 won’t carry over into 2011, but the sector should continue to perform well, says Ridgemont’s George Morgan.

The flurry of private equity telecom deals this year will likely be followed by a slight decline in activity during 2011, while the sector as whole remains poised for continued growth, according to partner at Ridgemont Equity Partners, George Morgan.

“I’m optimistic about the telecom sector in 2011,” Morgan says. “I think the market will be favourable and the companies will generally continue to perform well.”

Indeed, the number of US transactions in the telecom sector increased nearly 28 percent from last year, with 23 deals in the sector to date, compared to 18 last year. Globally, 59 deals have been announced in the sector, compared to 42 last year, for an increase of 40 percent.

One of the reasons Morgan believes the sector saw a spike in deals in 2010 was that firms were racing to close deals before the end of the year in anticipation of President Obama repealing the Bush-era tax cuts.

“Several of the companies that had been seeded in the early part of the decade had grown and performed well, the financing markets came back and there was obvious uncertainty about capital gains rates,” Morgan says. “I’m sure a combination of these factors drove some of the M&A activity in 2010.”

George Morgan

Ridgemont, which spun out of Bank of America in August, invests in sectors including consumer and retail, energy, healthcare, telecommunications and financial services.

One area of the telecom sector that Morgan is particularly bullish on is the fiber communications segment, which he believes remained somewhat insulated from the economic downturn.

“Of all the companies that we’re aware of in the fiber infrastructure sector, none of them went backwards during the economic downturn,” he says. “I think the trends for fiber-based companies continue to be good, in contrast to what happened early in the decade, when the fiber market had a supply/demand imbalance.”

In 2011, most of the companies in the fiber sector will likely be more internally focused on organic growth and executing their strategies, as opposed to M&A, Morgan says.

Despite his belief that there will not be the same level of deal activity in 2011 that took place in 2010, he remains bullish on the telecom industry as a whole. “If the economy picks up, the opportunities are there for the growth to continue and potentially accelerate.”