KKR, Cinven and Providence have combined forces to buy Spanish telco MasMovil, but with depressed share prices and regulatory opinions shifting, it could be the first of many corporate transactions.
The merger and acquisition landscape has been somewhat quiet over the last few months, since the COVID-19 pandemic set in across the world, but we struggle to believe there are not cash rich investment funds considering weighty purchases. The most successful investment funds are only such because they can sniff an opportunity, and this is exactly what the MasMovil acquisition should be viewed as; corporate opportunism.
There are still approvals needed from Banca de Espana, the Spanish Telecoms ministry and Industry & Commerce ministry (foreign investment approval), as well as competition authorities in the EU, China, Turkey, Serbia and Israel. However, we suspect the process will run smoothly, especially considering MasMovil CEO Meinrad Spenger has already said he would support the transaction.
First reported by Reuters, the trio of bankers have now made an official public tender offer for $3.3 billion, a 22% premium on the opening share price this morning (June 1). Share price has surged 20%, as one would expect, though it has only just crept above the pre-lockdown levels.
This is what is very interesting about the telco market currently; share price for all major and minor telcos is severely depressed. For those who have money available, and the desire to push into the telecoms space, it is a very attractive opportunity currently.
|Share price of selected European telcos during COVID-19 lockdown period|
|Telco||Share Price, June 1||Share Price, Feb 3||Change|
Share prices accurate at the time of writing – 10.30am, June 1
Some of the companies mentioned above would be too big to consider to be an acquisition target, Orange or Telefonica for example, though others could certainly fall into the right bracket. BT has a market capitalisation of £11.9 billion and is underperforming against UK rivals considerably, while the likes of KPN in the Netherlands could be another interesting target. Sitting third in the mobile market share rankings in the Netherlands, a cash injection and refreshed strategy could be a worthwhile gamble with the telco’s market capitalisation currently €9.42 billion.
Of course what is also worth noting is that the opportunity for acquiring business is not just limited to the bankers. Thanks to a ruling from the European Court of Justice, telcos might have renewed enthusiasm for market consolidation.
Last week, the General Court of the European Court of Justice annulled a decision made in 2016 to block a merger between O2 and Three in the UK on the grounds of competition. In annulling this decision, it challenges the long-standing belief that mergers which would take a market from four operators to three would be vetoed automatically.
This decision is very important for those who have been championing market consolidation. Some argue fewer telcos would results in more concentrated network investment, as well as scaled economics thanks to larger customer bases. The decision from the European courts opens the door for potential market consolidation.
There are of course markets where consolidation is not realistic, the Netherlands or Belgium for example where there are only three mobile network operators (MNOs) today, but there are others where this could be an interesting development. Spain is certainly one of them.
The Spanish market is one where there is plenty of competition. There are currently four major mobile operators, albeit MasMovil is an MVNO, while Euskaltel announced plans to challenge the market with a Virgin Media branded proposition. KKR, Cinven and Providence want to take control of MasMovil, but might Orange be tempted to muscle in on the action?
|Telco subscriptions in Spain (2018-2021)|
Source: Omdia World Information Series
MasMovil could look attractive to Orange for several reasons. Firstly, this is a telco which is heading in the right direction, subscriptions are growing year-on-year. Secondly, MasMovil has bought into the convergence business model which is being championed by the Orange Group. And finally, MasMovil is a MVNO customer of Orange’s Spanish wholesale business, making integration a bit simpler.
With the European courts turning a new page on market consolidation, possibly indicating authorities might be more accommodating of such transactions, this could be an idea which is being discussed in the Orange offices. It would make sense for Orange’s ambitions in the country, while MasMovil is open to some sort of transaction.
Some might also suggest Telefonica would be interested, but with the management team desperate to reduce the €44 billion debt burden and its credit ratings not exactly sparkling, this is unlikely. Vodafone might have considered such a move at another time, but it has larger problems to tackle without adding the complications of an acquisition, most notably in India and Italy.
Speculation aside, KKR, Cinven and Providence will attempt to buy the Spanish challenger telco. With a depressed share price and appreciation for the importance of the telecoms industry at its highest levels, we would not be surprised if this is only the first of several transactions from investment funds, though telco consolidation is also another story worth keeping a close eye on.