M&A Landscape — TELECOM, Food & Beverages, and Delivery?
Analysis of a few recent M&A deals that caught my attention and that will reshape the industries these companies operate in.
Telefonica’s O2 merger with Liberty Global’s Virgin Media in the UK
This merger will create the second largest fixed + mobile TELCO player in the country behind BT. At a valuation of almost £32bn, the re-positioning of both companies businesses and exploitation of cost synergies of about half a billion pounds alongside the control of about one-third of the UK market by telecoms services revenues is key.
Up until this transaction Telefonica’s O2 lacked direction, with failed attempts to sell itself to Three or to sell O2 to BT. However, this is a turning point for the UK’s TELCO industry. Up to now, it was only BT that offered mobile and fixed network services. Now this merger will have a second player in the industry striving to win clients and to grow in one of the most important markets for both firms by uniting the country’s second-largest broadband network with the largest mobile network. Under the merger, 11bn in revenues and 46million customers are expected to be garnered by 2021 (FT).
This will force other competitors like Sky and Three to compete against much larger TELCO groups. In fact, the merging companies said they would invest 10bn over the next 5 years in the UK.
It is clear that M&A is one this industry’s drivers as a way of growth (inorganically). What is important from now onwards is that cultural mesh and shareholder value are created. As the debt of both counterparts is reduced (Telefonica’s by around 6bn pounds) and the customer acquisition potential rises, it will definitely be interesting to see how the merger plays out and how the rest of companies react. Now, O2 and Virgin Media will have to capitalize upon their distribution channels, a leaner cost structure and an omnichannel offering to the UK’s clients in order to battle for the industry’s #1 spot.
PepsiCo’s acquisition of Rockstar
This acquisition is the classic example of an industry giant acquiring a smaller but promising company that appropriately fits its product line and business strategy, whether it is to appeal to new customer segments or to garner market share.
PepsiCo recently acquired Rockstar for $3.85bn as a direct mode of entry into the fast-growing energy drinks market. It makes sense, as this segment has been growing in size and allows the firm to diversify its holdings, reducing the reliance on sugary and fizzy drinks. In fact, according to the FT, the energy drinks category is forecasted to grow to more than $80bn over the next five years.
What will be interesting to see is how PepsiCo leverages its expertise, distribution channels (placement) and marketing (promotion) in order to boost the brand’s market share in an increasingly crowded market space where Monster and Red Bull own 42% and 35% of share respectively. Some strategies to garner market share include; expanding distribution channels, readjusting prices to appeal to more consumers, boosting brand awareness through a PR campaign or increasing online presence by riding the e-commerce wave. And this brings me to the following point.
PepsiCo recently launched 2 Direct- to-Consumer websites named PantryShop.com and Snacks.com where customers can directly purchase their desired food or beverages. As Covid19 alters consumer purchasing patterns, this strategic move might also help boost awareness for Rockstar and help reposition it in the mind and purchasing habits of American consumers when watching sports or hanging out with friends.
Uber’s acquisition of GrubHub (Will it happen?)
While this one is still an unknown, GrubHub shares spiked more than 30% upon the announcement of the potential move. This acquisition means Uber would have 52% of the US food delivery market share — staggering. Not only this but the synergies achieved by merging the large number of restaurants GrubHub has signed up on its platform plus the vast number of drivers Uber has on the road would create a very powerful player.
For Uber, this would be a brilliant and sensible strategic move to consolidate its food delivery business segment and try to reach its ambitious goal of being profitable as early as possible. Furthermore, the move signals an adaptation to a consumer trend that has been accelerated by the Covid19 lockdown — less eating in restaurants/public spaces and more home food delivery. GrubHub would also welcome the move as it has seen its market share in the US meal delivery market go down from 50% to 28% from 2018 to 2020 respectively.
Lastly, this potential merger has brought up some concerns of Uber having an increasing bargaining power over small restaurants (squeezing their razor thin margins) and exploiting workers not treated as employees.
In any case, if this goes ahead it will be game changing for the industry.
Thank you for reading!