Private equity and venture capital investments in the telecommunications services sector soared in the third quarter, reaching $5.04 billion, thanks primarily to one outsized deal.
The massive increase was a sharp reversal from the steep decline seen in the first half of the year, when investments totaled just $1.53 billion, according to S&P Global Market Intelligence data. That was a 79% drop compared to the same period in 2023.
KKR & Co. Inc. and T-Mobile US Inc.'s agreement to acquire a 50% stake in fiber optic telecommunication services provider Metronet Holdings LLC accounted for nearly all of the sector's deal total in the third quarter. That transaction, valued at $4.9 billion, exemplifies the broader "convergent strategy" being pursued by US-based telecom operators, which involves combining traditional wireless services with broadband and fiber to meet diverse consumer needs, said Philip Wong, a principal at KPMG's advisory practice.
The telecommunications sector consists of providers of communications and high-density data transmission services through high bandwidth and fiber-optic cable networks, operators of primarily fixed-line telecom networks and companies offering cellular, wireless and fixed-line telecom services, including internet service providers.
Interest rate sensitivity
Private equity investment deal value and volume in the sector last year fell to its lowest level since at least 2020. Transaction value plunged about 57% year over year in 2023 to $8.61 billion. The number of deals dropped by 24%, falling to 72 from 95 the year prior.
Slowing investment activity is linked to high interest rates, which have dampened demand for broadband and telecommunication services for investors, according to Tyronne Singh, a partner at KPMG'S advisory and strategy group.
"Capital-intensive industries like telecom are especially sensitive to interest rate hikes," leading to decreased returns and lower investment levels, Singh said.
Another factor is a shift in how telecom infrastructure is perceived, according to Ajit Pai, a partner at SearchLight Capital.
"[I]t's become increasingly clear that these networks can be a little harder to build," leading investors to expect longer maturation periods, Pai added. Those extended timelines have caused investment levels to decline.
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Largest deals
The KKR and T-Mobile deal was the largest transaction in the telecommunication services sector since January 2023, Market Intelligence data shows.
The second-largest deal since the start of 2023 was Searchlight Capital Partners LP and British Columbia Investment Management Corp.'s deal to acquire their remaining majority stake in broadband and business communication solutions provider Consolidated Communications Holdings Inc. for $2.81 billion.
That was followed by a $2 billion funding round for telecommunications services provider AT&T Mobility II LLC led by Apollo Global Management Inc.
A sunnier outlook
Pai remains optimistic about the sector given that telecom networks often provide strong and recurring revenue streams, which appeals to investors. The surge in adoption of artificial intelligence is likely to be the main driver of growth, upstaging the previous attraction of 5G investment, KPMG's Wong added.
The proliferation of data centers serving as AI infrastructure is expected to fuel growth in the telecom services sector.
"Every one of these new data centers has a high bandwidth ... and that's driving a lot of private demand and anticipation," Wong said.