OVERVIEW OF THE DEAL
On March 29 2021, MasMovil has proposed a €2 billion takeover bid to acquire its Spanish competitor Euskaltel. The aim of this merger is to create a major competitor in the European telephone operator market. The Spanish telecom operator Euskaltel said its board of directors had agreed to negotiate the takeover offer from rival MasMovil.
The European telecommunications sector has been threatening by low profits for many years. A merger between the fourth and fifth largest players in the Spanish market could revitalize the sector and the new merged company will be able to compete with Orange, Vodafone and Telefonica.
Masmovil is willing to pay a 27% premium to Euskaltel’s weighted average share price over the past 6 months and 16% to the current share price before the announcement of the deal. The Spanish company, founded in 1997, has received the support from its largest shareholders, counting for 52% of its capital. Masmovil is offering €11.17 per share in cash. “Masmovil and Euskaltel together form a solid and complementary industrial project”, Masmovil said in a statement. According to the telecom operator, this friendly takeover would help the firm to “reinforce and boost its growth and continue transforming the telecommunications sector in Spain”.
Company Details: Acquirer – MasMovil
Founded: 1997
Headquarters: Madrid, Spain
CEO: Meinrad Spenger
Status: Private
Number of Employees: 1,000+
Revenue: €1,700m (FY20)
EBITDA: €600m (Q1-Q3 20)
Masmovil is a spanish company in the telecommunication sector founded in 2006. The company operates in the Iberic Peninsula, with three subsidiaries in Spain (Yoigo for low-costs subscriptions, Pepephone and Lycamobile España) and one in Portugal (NOWO). In 2020 Masmovil’s sales reached 1.7 billion dollars with a total of 8.9 million customers in Spain. On June, 1rst 2020, the investment fund KKR, Cinven and Providence Equity showed their interest in Masmovil through a takeover bid, which caused its share price to rise by 22%. Once the bid was accepted, Masmovil became private and left the IBEX 35 Index.
Company Details: Target - Euskaltel
Founded: 1995
Headquarters: Derio, Spain
CEO: José Miguel Garcia Fernandez
Status: Public
Number of Employees: 720
Market Cap: €1,976m (as of 4/19/21)
Revenue: €697.1m (FY20)
EBITDA: €342.8m (FY20)
Euskaltel is a Spain-based company providing integrated telecommunication services. It operates in three segments: mass market customers (80.9% of their sales), companies (16.9%) and wholesale (5.1%). The first segment includes fixed and mobile telecom services, wireless and broadband Internet and digital television. The companies segment provides the same equipment intended to all-sized businesses. Finally, the smallest division serves wholesale customers and is in charge of infrastructure leasing, IT outsourcing and sale of installation and electronics equipment.
One of the particularities of Euskaltel is that the company only focuses on the Basque region, conversely to other telecom firms in Spain which generally have a wider scope in the country. The majority of the company is controlled by three investors: Zegona (21.4%) a UK-based operating company specialized in the acquisition of telecommunications businesses, the basque bank Kutxabank (19.9%) and the spanish investment fund Corporación Financiera Alba (11%).
SYNERGIES
Cost Synergies
“MasMovil and Euskaltel together form a solid and complementary industrial project,” MasMovil said in a statement, adding that the takeover would allow it to “reinforce and boost its growth and continue transforming the telecommunications sector in Spain.” (Reuters). Euskatel’s owns minimal fiber infrastructure but it’s backed by hybrid fiber-coaxial technology (HFC) which could be used by Masmovil. Euskaltel leverages Orange and Telefonica’s network infrastructure in many regions of Spain and plans to invest even more in fiber infrastructure. That is why Masmovil could have a better use of its digital network by taking part of Euskatel’s network traffic.
Northern Spain, a region where Euskaltel has a strong presence, is not yet covered by MasMovil. MasMovil’s expansion in this region should be facilitated by the integration of the HFC technology - due to Euskaltel’s recent investments -, therefore reducing expansion cost. Then those cost savings will allow Masmovil to fasten its 5G infrastructure investment plans in Spain. Masmovil has to invest in fiber roll-outs and 5G spectrum purchases in order to pass additional homes but the lack of capital slows down that strategy. That deal will therefore create industrial and cost synergies which would increase Masmovil competitiveness nationwide.
Complementary R&D resources should also allow MasMovil to gain momentum in the race towards 5G commercialization in the country. Given how highly competitive the telecom industry is, gaining early access to 5G would grant MasMovil a niche to harvest high margins, a very precious outlook for telecoms.
Revenue Synergies
This merger would probably allow a boost in revenue. First, in the short-term, since the two companies have similar activities, the merged entity would have a bigger market share. MasMovil notably gains a solid foothold in the northern Spanish market since Euskaltel’s core network assets are concentrated in the regions of the Basque Country, Asturias and Galicia where the company operates with different brand names: Euskaltel, R and Telecable. As intangible assets, those brands are valuable notably to retain customers in that region, that is partly the reason why MasMovil said it would maintain them. Overall, MasMovil, together with Euskaltel, is expected to form a company with 14 million customers, 26 million homes passed with fiber and revenue of 2,7 billion euros.
Adding to that, MasMovil intends to profit from Euskaltel’s growth that is higher than the industry average according to the former. Euskaltel recently embarked on a national expansion strategy, launching services across Spain under the Virgin telco brand. The company said in a trading update in March 2021 that it expected to increase its customer base by 150 000 per year with this new project.
In the long-term, the transfer of technologies and the share of knowledge would increase MasMovil’s competitiveness while the company’s new size would strengthen its position as Spain’s fourth-largest telecoms company, competing with Telefonica, Orange and Vodafone.
Financial Synergies
The financial synergies are not the ones directly targeted by MasMovil’s management. Among some benefits that could result from this deal if completed, are the reduction of tax expenses - lower taxable income - due to the incorporation of Euskaltel’s important PPE (€1.261bn of net PPE in FY20) and related D&A (€196.5m in FY20), and deferred tax assets amounting €126.5m in the 2020 released balance sheet. However, these benefits should be at least partially offset by the increase of the cost of capital induced by this deal. New liquidity and solvency risks for MasMovil, detailed later in the article, may raise banks’ and investors’ awareness and increase the cost of debt with higher interest rates.
RISKS AND UNCERTAINTIES
As we previously mentioned, competition in the telecom market is extremely tight. The acquisition of Euskaltel does not guarantee MasMovil will be able to extend its margins significantly, since the constraint of market competitors is far from nullified. As Spain’s fourth largest telecom company, the presence of Telefonica Vodafone and Orange in the Northern region of Spain means it is unlikely the fee “standoff” will see any changes.
Given these conditions, the level of debt that MasMovil will cumulate after the purchase seems worrisome: Spanish news outlet El Pais reported total debt will surpass €6B after the acquisition. The purchase price will be entirely financed by debt, the €2B sum will be amounted thanks to a coalition of 6 banks (BNP Paribas, Santander, Barclays, Deutsche Bank and Goldman Sachs). If MasMovil is unable to increase their EBITDA, it would be bound to carry that staggering amount of debt for quite a while considering competitors may exploit the holy grail that is 5G before MasMovil does.
A recurrent trend among industry juggernauts is to mimic competitors’ expansionist behavior. The telecom industry is one that still has many possibilities of market concentration: O’Hare said there were still more than 150 companies in European telecoms and media that could be acquired. If any of MasMovil’s bigger competitors start acquiring new companies of their own and in doing so they manage to make economies of scale, then MasMovil could be left behind to struggle on its own.
The acquisition has triggered some political unease: it being the takeover of a Basque company by a mainland Spanish group disturbed some politicians, namely among the parties EH Bildu and Podemos. The former decried the acquisition as being yet another blow to Basque sovereignty. The troublesome political landscape might affect the group’s rating.
FINANCIAL CONSEQUENCES
MasMovil is a private company, therefore little data is available regarding debt levels and upcoming EBITDA projections. As a consequence, we rely on credit rating agencies’ responses to the announcement of the deal to assess potential impacts on leverage. Standard & Poor’s and other agencies expected MasMovil to grow internally, hence the bid casts doubts on the management’s intention to lower its leverage. The Debt-to-EBITDA ratio is currently estimated around 4.5x (S&P) and 4.75x (Moody’s). The rating agencies, albeit optimistic concerning synergies prospects, underline that infrastructural costs could emerge due to investments that may be needed to complete Euskaltel’s roll-out of fiber or to compensate the reduced probability of partnership with others infrastructure providers. In addition to the deal’s funding, such preoccupations forced Moody’s to consider downgrading MasMovil from its « B1 » rating. S&P maintained its « B+ » ratio but moved its prospects from « stable » to « negative ». Indeed, if the bid turns out well, their estimates places Debt-to-EBITDA ratio expected for 2021 from 5.6x (S&P) to over 6x (Moody’s) before synergies. According to Moody’s, MasMovil’s liquidity is not a priority concern thanks to €417 million of estimated cash balance and a revolving credit facility valued at €500 million.
Given the difficulty of evaluating synergies, we decided to study the most pessimistic scenario where there would be no synergies. Nevertheless, the only contribution of the Net Income resulting from the merger operation leads to an accretion of 732%. Indeed, the deal being 100% cash financed and the foregone interests on cash being 4%, then the cost of cash is 3%. The PER being 27, we deduce that the yield of the seller is about 3.7%, which confirms that the deal is accretive. The Earnings Per Share increases from 1 cent to about 8 cents. The deal therefore creates value for the shareholders. Of course, this estimate does not take into account synergies or other factors such as the compatibility of the companies and the overall impact.
IS THIS DEAL FAIRLY PRICED?
MasMovil is willing to pay Euskaltel’s Total Value of €3.5 bn, which values the company at 10.88x its EBITDA. If we compare this multiple to the 10 previous deals in the telecom industry, we found that the median TV/EBITDA was 9.44x, which puts this deal well within the norm in the sector.
Among some of the 10 last deals in the industry, there were deals like the acquisition of Katel Deutschland (the largest cable television operator in Germany) by Vodafone, in which Vodafone paid Katel 7.19x its EBITDA. Another deal was the takeover of SFR by Numericable, for 11.31x its EBITDA. Those deals are relevant to study are facing the same challenges within the industry (tighter margins, higher level of infrastructure, fierce competition). Overall, the deal seems to be fairly priced.
MARKET REACTION AND PROBABILITY OF DEAL COMPLETION
The market reaction after the announcement of the deal was unequivocal: Euskaltel’s shares soared by 15.95%, closing at €11.12 just below the €11.17 offer price. This immediate positive reaction was naturally incentivized by the fact that 52.32% of Euskaltel’s shareholders had already accepted the offer, meaning a strong probability of deal completion. Most analysts were quite surprised by this news as they had bet on a merger between MasMovil and Vodafone. The market also priced that this operation should be a main catalyst for the trend towards the low-cost segment. Telefonica’s share went down 4% as a result of a stronger-than-expected competition in the segment.
Authors: Gabriel Bouvet, Victor Godfrin, Léo Clément, Martín Palomar, Nathan Eido, Julie Lin, Paul Guérin, Thomas Chamonin, Alexis Bernet
Contact: alexis.bernet@hec.edu
Date: 21-Apr-2021