The Australian M&A Outlook: 2023 Technology, Media and Telecommunications Industry Insights

The sector finds its ‘new normal’ as high-quality assets remain in demand.

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Volatility is subsiding and valuations are resetting as the sector rebalances. That’s not to say things are quiet in 2023. We’re predicting a return to growth in deal activity in the coming months, while investors scour the market for assets with defensible positions that generate cash and offer strong growth prospects.

Reset and rebalance: How TMT dealmakers are tackling the new norm

Australia’s Technology, Media and Telecommunications (TMT) sector is in the midst of a reset following the accelerated highs of 2021 and 2022. TMT dealmaking is undergoing a cyclical rebalance, compounded by rising interest rates, inflationary pressures, declining access to capital markets, and less ambitious valuations. In addition, the collapse of select US-based banking institutions may result in further tightening of international debt financing in the TMT sector.

However, after a period of accelerated digital adoption by consumers, enterprises and governments during the pandemic, the market has found its ‘new normal’, and we’re predicting a return to growth in deal activity in the remainder of 2023. Yes, TMT deal valuations are adjusting to the ‘value gap’ between buyers and sellers. But high-quality assets will remain in demand – and be well contested – particularly those assets with a strong market position, differentiated capabilities, and a clear outlook for profitable growth. To minimise the valuation gap, those stakeholders who can be creative about structure (for example, where vendors retain more equity ownership, or where bidders include earn-out and/or preference share optionality) could prove more successful in converting deal opportunities right now.

Current landscape: Bridging the gap between buyers and sellers in a new price environment

The TMT landscape has changed due to the acceleration in digitisation across every sector, business, and customer interaction during the pandemic. We’ve identified these major trends within the current TMT deal landscape:

The TMT sector in Australia is growing

The acceleration of ‘all things digital’ during COVID, and the widespread adoption of technology, means digital infrastructure is more critical than ever. There’s now greater clarity around what the emerging technology landscape will look like, as well as which players are likely to be successful in the medium term. So, which domestic businesses are thriving in the current environment? The answer is, those that have achieved the scale for entry into new global markets, or those that have partnered with global technology platforms or service providers (such as Microsoft or Amazon) to develop a strong local or niche market position in Australia.

Cash is king

Previously, early-stage technology assets, often funded by large domestic pools of venture capital (VC), might have prioritised revenue growth over profitability and invested heavily into customer acquisition. These assets are now facing a more challenging financing environment (this is especially the case in later funding rounds, with higher debt service costs). TMT businesses in mature sectors have been undertaking significant cost reduction initiatives to ensure longevity and a more sustainable cash burn. Some subsectors are proving more resilient than others, including businesses that play in the healthtech, fintech, business services or mining tech verticals. Some that haven’t yet transformed the way they deliver services are showing early signs of distress, and there may be opportunistic acquisitions of technology or intellectual property.

Investors are ready to deploy

We’ve seen a market correction in valuations of TMT businesses in the past year due to rising interest rates and inflationary pressures. Now, investor interest in the sector is shifting again, with significant funds in private equity (PE), and greater participation from infrastructure and ‘Core Plus’ investors looking for TMT targets with strong fundamentals. Investors are scouring the market for assets with defensible market positions that generate cash and have strong prospects for profitable growth in the short to medium term. Buyers with ‘dry powder’ from recent fundraising activities will continue to monitor opportunities in the hope of executing deals at lower valuations, with an eye on stable long-term growth and returns.

Stakeholders who can be creative about structure could prove more successful in converting deal opportunities right now.

Market outlook: Technology and services likely to dominate

We expect the following areas to be hot spots of M&A activity in the rest of 2023:

Tech-enabled services

COVID has accelerated the digital transformation journey across virtually every business, and tech-enabled services and software continue to be key themes. Given the ongoing shift to cloud-based solutions, we expect IT services and software assets to pursue scale in key areas of capability and aspirational growth. Additional scale, plus a focus on recurring revenue (e.g. provided by contracted managed services or platforms) will result in keen interest from domestic and international PE, and could see investors seeking infrastructure-like characteristics. At the same time, managed service platforms will become increasingly relevant to PE portfolio businesses as a means of securing ongoing cost reduction and digital transformation. 

Additionally, opportunities lie in artificial intelligence (AI). Companies are making investments to expand and scale AI capabilities (see: PwC’s $1bn investment in AI) as the technology gets more advanced and traction grows among consumers (e.g. the widespread uptake of ChatGPT).

Following the market correction in tech valuations, PE investors and corporates with strong balance sheets are likely to make the most of lower asset prices. The result? More public-to-private transactions are on the cards despite the economic headwinds. We’ve already seen activity in public-to-private deals, including those involving Nearmap and Tyro Payments, and we expect this trend to continue with both domestic and international investors.

At the same time, the increased volume of information shared and stored online means cyber attacks are increasingly likely. Recent high-profile data breaches show there’s more work to do on information security in Australia, and organisations are increasingly investing to minimise the risk. We expect this to be a concern affecting both the ‘business as usual’ operating environment and M&A activity in the sector.

Traditional media affected in different ways

After the post-COVID media resurgence in 2022, this year has seen growth in advertising expenditure despite advertisers facing a tough macro environment. Major advertisers and brands have continued to invest to ensure they remain part of the consumer's journey in the ‘new normal’. We're now in FY24: In FY23, forecasts for total advertising expenditure was expected to slowdown in YOY growth to 3-4% (following a strong market rebound in 2022 of ~8% growth). The resurgence has not been split equally, and the big winners are digital social platforms, out-of-home digital networks, radio, and cinema. We expect traditional media players to pursue scale and support back-office savings. There’s also the potential for PE to scale up more attractive segments, such as out-of-home networks and radio.

Subscription services continue to gain viewing share. Local standouts are Kayo and Stan, thanks to a growing preference for direct-to-consumer models, and increased testing of new ad-funded models (including testing by Netflix). As these models mature, and as cost-of-living pressures rise further, there’s the potential for customer churn as households switch to a smaller set of ongoing preferred services. This should force a shake-up among key players, creating opportunities for significant commercial and equity partnerships around content catalogues, best-of-breed platforms, and customer experience models.

Global social platforms still consume the most media spend, however, the shine has come off international players. This is due to a combination of antitrust, data privacy changes, and the elimination of cookies, and it will impact less effective content engagement platforms (e.g. Snap). It also creates deal opportunities for less regulated mediums that have roll-up and/or scale-up potential (e.g. influencer marketing, sport networks, and codes for loyalty platforms). Expect ramifications for the local market, too.

Telecommunications

It’s business as usual for the telecommunications (telecoms) industry as the sector’s transformation continues in 2023. In the current inflationary environment, telecom operators are adjusting their prices (where contractually possible) and seeing moderate rises in average revenue per user (ARPUs) as a result. The need for large capital investments continues with digitisation placing greater demand on core network capacity. Telecoms operators are investing in 5G mobile and fibre network upgrades as a result.

ANZ telecom operators have also been responding to this pressure by reviewing which assets drive value and, in turn, which assets they should hold on their balance sheets. In the past couple of years, most telecom operators carved-out their tower businesses, and we’re expecting operators to apply similar logic again and, therefore, shift their attention to other asset classes, such as fibre and other passive assets.

Some telcos are also exploring growth pathways into adjacent services or industry solutions, with the idea of diversifying revenue streams and maintaining relevance to customers. Telstra Enterprise, for example, has acquired numerous platforms to boost its offerings.

Investors are scouring the market for assets with defensible market positions that generate cash and have strong prospects for profitable growth.



Next steps for dealmakers

Following a period of market volatility, it’s important for dealmakers to focus on M&A that is accretive to their overall investment strategy and portfolio, particularly as it relates to long-term growth and capability.

There’ll be plenty of opportunities in TMT throughout the year, including:

  1. The rapid and continuing evolution of ecosystems in different industry verticals. It’s increasingly clear who the likely winners are in achieving sustainable and defensible market positions. And the COVID period, followed by a market correction, has given rise to attractive investment opportunities for those seeking stable returns with growth potential

  2. Vendors are increasingly looking for investors that support them through their next phase of growth. While vendor motivations may differ, we’ve generally seen vendors become less focused on complete divestitures and, instead, prioritise partners with capabilities that will help them scale or achieve global reach. They’re looking to PE, VC, corporates, or joint ventures for partnerships, and they’re hoping to realise long-term value

  3. PE and Core Plus investors are sitting on substantial capital and so they’ll continue to focus on finding attractive assets and opportunities. Expect additional attention on pre-deal planning, with a clear value creation plan (for post-deal implementation) to support increasing stakeholder returns over the medium to longer-term

  4. Trade and strategic parties with strong balance sheets have a competitive edge when it comes to valuation, particularly as it relates to synergies, or to strategic capabilities to drive future growth and efficiency.

Explore our national findings plus other industry insights as part of this series 

 

Contact us
 

Chris Bartlett
Technology, Media and Telecommunications Deals Co-Leader

Brett Duell
Technology, Media and Telecommunications Deals Co-Leader

Elizabeth Fritts
Technology, Media and Telecommunications Deals Partner

Christopher Moxey
Technology, Media and Telecommunications Deals Director

Ben Cheung
Technology, Media and Telecommunications Deals Director




 Disclaimer

About the data: We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic, Preqin, S&P Capital IQ and our independent research and analysis. This publication includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.