What Next for TMT Financiers?

By Sophie Papasavva, Partner at EMFC Loan Syndications LLP


With telecoms operators so cash rich and margins continuing to drop, where next to invest for TMT financiers?
Financing ancillary businesses to traditional TMT, perhaps?
What better than an ancillary with direct telco risk behind it?

Long the envy of their peers, telecoms financiers have worked in one of the most exciting industries of the finance world. With the exception of some hiccups here and there, they have been involved in some of the most lucrative transactions of the past 15 years. They have amassed a wealth of knowledge on innovative structures beyond mere leveraged deals - on the pockets of liquidity available to fund this once fast moving industry, and on markets spanning the entire globe, from North America to the emerging economies of sub-Saharan Africa. However, with returns continuing to decline and competitive pressure failing to ease, it may be time to apply this know-how to sectors  offering higher growth prospects and better margins, while relying on that all-familiar telco risk.

Specialist Knowledge

Those who have financed a telecom operator or two will certainly have a gained some expertise in the peculiarities of the sector: familiarity with licensing and the accounting treatment of such, understanding the role of the Intelligent Network, accepting the constant need to upgrade capacity as well as the inevitable drop in ARPUs, understanding churn dynamics, recognising the crucial role of sales and marketing, valuing the need of a strong brand, transparent pricing, innovative bundling, customer loyalty and retention schemes. There is a lot of know-how that differentiates telecoms bankers and equity investors from others. Some of it is technical and some of it is just a function of the industry’s quirks, but all of it requires the ability to glance at a term sheet and instantly assess the viability of a transaction. This is where industry experts add their value.

Declining Margins

There is some concern as to where this expert knowledge has driven the telecoms financing world. Even after the persistent fall in margins seen since the last quarter of 2009, certain highly-rated telecoms operators continue to be able to exercise pressure on their core relationship bankers to lower margins and cut lending yields even further. This is against the backdrop of what for some is already an unprofitable market. Earlier in the year, France Télécom signed a €6bn facility, setting a new benchmark for A-rated borrowers with a margin on the 5-year loan set at just 40bps, while Zain is reported to be paying as low as 100bps on the 1-year tranche of its US$1.3bn facility. At the same time, the cost of funding for banks is rising, while Basel III is likely to give rise to more stringent capital requirements. The motivation to meet ever-increasing budgets in one of the most competitive sectors seems to persist as the greatest driver. Whereas certain larger institutions - banks and equity houses included - have access to more favourable costs of funding, with margins easily at the sub 100-bps level, how many financiers are really able to participate in such deals and actually make an adequate return for their shareholders?

Which ancillary businesses?

Tried and tested ancillary businesses have included supplier and towers financings. Financiers of network suppliers, for instance, are familiar with hardware manufacturing. Towers financing, meanwhile, is inherently a real estate play, since it carries the risks (and rewards) of property booms and busts - albeit with telecoms operator risk to support the business case. As tangible assets, hardware and security in bricks and mortar are the mainstay of traditional TMT financing. Risk is at a minimum, but of course so is the reward.

But anyone who has recently picked up an industry report or magazine will be acutely aware of the gradual but certain growth in software over hardware. There is significant speculation as to whether telecoms operators are capable of adapting their business models to take advantage of the inevitable change in consumer demand and provide new services that are valuable revenue opportunities. Extensive writing on the danger of telecoms operators becoming a ‘dumb pipe’ has awoken some to realise the great potential and huge advantage they hold as keeper of end-user connectivity. But whereas telecoms operators have limited interest (or resources) to invest in software developers for ringtones, mobile applications and software as a service, perhaps there is a role TMT financiers can perform to bridge the gap between lucrative software providers and the ‘pipe’ operator.

Mobile application and content developers are in constant need of financing. They are the ones developing the applications consumers are spending millions of dollars to download each year. Such companies rarely have a direct relationship with the end-user, instead producing their apps for the likes of Apple and or other household names seeking market share in the smartphone or tablet space. Whereas it is inevitable that this market will continue to grow alongside the increased use of personal devices - the financing of which such has mostly been limited to private equity or other specialist financiers - bankers have generally kept away. This is surprising, since the business model is not that different from that of the TV content providers. So perhaps TMT financiers will grow to accept this fast-paced segment. Indeed, the mobile application market remains fragmented, with the majority of companies too small and the up-take success of each new app too uncertain. But it is nonetheless moving in the right direction.


Whereas it might be a little more difficult to consider funding content for mobile devices, there is absolutely no uncertainty that software, rather than hardware, is where ancillary revenues are to be derived for our telecoms clients. For those seeking a related business that is fast growing, driven by vital broadband investment, based on long-term contracts, generating monthly cashflows, making subscribers stickier and crucially, relying on proven technology - cloud computing in general and Software-as-a-Service in particular could be the answer.

Software-as-a-Service or ‘SaaS’ refers to highly scalable applications provided by a cloud service provider, offered on a pay-as-you-go basis and accessed by end-users at any time over their own internet connection; typical examples of SaaS include hosted e-mail, collaboration software and Microsoft’s Office 365, a cloud solution for the popular software packages of Word, Excel and Powerpoint, which is due to launch this summer. Another famous example of SaaS is Salesforce.com, which offers customer relationship management software to business customers (including banks) over the internet, without the need for software installation on users’ desktops or laptops.

Cisco Forecasts

Cisco estimates that the global cloud computing market was valued at just over US$30bn at the end of 2010, and expects this spend to nearly double to just under US$60bn by 2012. SaaS is expected to see the US$10bn spend estimated for 2008 growing more than three-fold to US$35bn by 2012.[1]

Deloitte forecasts that the SaaS market will reach US$17.8bn in 2013, representing a CAGR of 17.2% for the five-year period from 2008.[2] Other industry analysts agree that the market for providing software over the internet, which is accessed directly by subscribers paying monthly fees on a per user basis, is a huge growth area for the industry. Facilitating this growth is of course the continued global increase in broadband internet.

White-Labelling SaaS

Telecoms operators have already positioned e-mail as the first cross-segment fixed-mobile convergence play, with the majority offering Blackberry, Nokia messaging and other e-mail services to the market. Today however, there are very few that have deployed professional, managed IT services including e-mail, in a way that adequately penetrates the ever-growing SME market. Operators face challenges in the cost and time it takes to build and deploy a new technology platform to accommodate SaaS, and in the 9-18 months required to prepare for commercial launch. For this reason, several operators have looked to dedicated cloud services providers to furnish them with a value added service, which will improve customer loyalty and reduce churn - and to a much lesser extent, augment data ARPU levels.

Central Europe On-Demand

Central Europe On-Demand Zrt. poses a particularly interesting case study of a business that has made a success of providing SaaS to telcos, which in turn offer such services to their customers. The company is a cloud services provider headquartered in Budapest, offering Microsoft and other software resources over the cloud, through 16 telecom partners across 10 European countries. The company’s business model comprises fixed-line and mobile operators as partners, which resell CE On-Demand’s hosted software services under a ‘white label.’ The company is an example of a business that relies on telecoms operators’ ability to sell VAS to their subscriber base, uses proven technology (the internet) and proprietary software to connect to its partners, maintains multiple partners to achieve economies of scale and diversified revenues, and generates cashflows from long-term contracts based on minimum monthly fees.

Central Europe On-Demand

Telecom partners of CE On-Demand like the service (and its revenue stream), particularly because while they are not required to make additional hardware capital investments, offering SaaS to their subscribers allows them to leverage their existing infrastructure as a competitive advantage. As far as the end-user is concerned, the e-mail and other software is provided by their telco, managed online and paid monthly per seat. Behind the scenes, CE On-Demand is maintaining the entire service. White-labelling SaaS through telcos alleviates a cloud service provider’s cost obstacle associated with sales and marketing to the underserved SOHO and SME market – the most likely to look to the trusted brand of their telephony operator to help solve their IT needs. Although CE On-Demand also targets certain corporates directly, its white-label play is its most successful business, having turned EBITDA positive after just two full years of operation. Exponential market growth, known technology, cash-based business, pay-as-you-go, reliance on proven ability to up-sell VAS, 2-3 year contracts... these are all very familiar concepts for telecoms financiers. Cloud service provider CE On-Demand is therefore a perfect example of a successful business, ancillary to telecoms, but with direct telco risk behind it.


The incentive to look beyond telcos, especially further up the value chain, is to achieve higher returns - where better than higher returns with white-label telecom operator risk? When such returns rely on execution by some of the largest and best organised existing sales channels, part of the risk associated with a cloud services provider (or a mobile app developer) is mitigated. Strong, stable receivables from large, established and cash-rich partners should make such sectors very attractive alternatives to pure telco risk and thus a great opportunity for TMT bankers and investors.

It is a certainty that software, not hardware, is the future of TMT. The sector’s financiers cannot afford to ignore this for much longer, even if telecoms operators are slower to react. Our role should be to help our clients tap into the potential offered by this opportunity, and one of the fastest ways to achieve this would be for us to finance their partners. By using our sector knowledge, we can facilitate the growth and success of ancillary business models, to ensure that our telecom clients do not miss out on the opportunity from apps and software. Instead, they should generate significant profits from it, while enabling us to generate significant profits from it through them.

The author would like to thank the management of CE On-Demand for permitting the inclusion of company information for the purposes of creating a case study for this article.

About the Author

Sophie Papasavva is a Partner at EMFC Loan Syndications (“EMFC”), a boutique advisor assisting companies seeking to raise bank debt. EMFC acts as an additional ‘in-house’ resource, project managing the loan-raising process on behalf of time-constrained finance teams. Prior to establishing EMFC, Sophie was a loan banker for 12 years, first as telecoms, media & technology relationship manager and later in loan syndications and sales, where she gained experience in multiple sectors such as oil & gas, mining, infrastructure, agribusiness and others. Sophie has originated, structured, executed, sold, restructured and syndicated loan financings ranging from simple bespoke bilaterals to complex multi-billion dollar, multi-currency syndicated transactions. Her expertise lies in arranging structured, bespoke financings for corporate borrowers operating in the emerging markets. To contact Sophie, please e-mail her directly at sophie@emfc-loans.com or follower her on Twitter at @Sophie_EMFC.

About Central Europe On-Demand

CE On-Demand is a cloud services provider headquartered in Budapest, with operations spanning ten European countries. The company is the largest provider of Microsoft-based software-as-a-service applications throughout the CEE region. Its white-label business model involves fixed-line and mobile telecom operators as partners that resell cloud services hosted by CE On-Demand; such software applications are offered under the telecoms operators’ own brand name or ‘white label’ directly to their subscriber base. After just three years of operation, CE On-Demand forecasts 1.5 million end-users under management by year-end. The Company is privately owned, having been funded to-date by its founders and additional private equity rounds. To contact CE On-Demand please e-mail Judit Szabó, Marketing and PR Director at jszabo@ceondemand.com.

[1] "Transforming Enterprise IT Services with a Secure, Compliant Private Cloud Environment;” Cisco Systems, 2010

[2] “Defining the Cloud” Deloitte, Oct 2009

Sophie Papasavva

Sophie Papasavva

Sophie Papasavva is the Founding Partner of EMFC Loan Syndications (“EMFC”), a boutique firm assisting companies seeking to raise bank debt. EMFC offers Loan Execution Support, acting as an additional ‘in-house’ resource to time-constrained finance teams. Prior to establishing EMFC, Sophie was a loans banker for 12 years, first as telecoms, media & technology relationship manager and later in loan syndications and sales, where she gained experience in multiple sectors such as oil & gas, mining, infrastructure, agribusiness and others. Sophie has originated, structured, executed, sold, restructured and syndicated loan financings ranging from simple bespoke bilaterals to complex multi-billion dollar, multi-currency syndicated transactions. Her expertise lies in arranging structured, bespoke financings for corporate borrowers operating in the emerging markets. To contact Sophie, please e-mail her directly at sophie@emfc-loans.com or follow her on Twitter at @Sophie_EMFC.