June 1, 2020 / 6:32 PM / a month ago

Breakingviews - Buyout firms make first move in EU telco shake-out

A balloon with the MasMovil logo is seen as the telecoms company makes its stock market debut in Madrid, Spain, July 14, 2017.

LONDON (Reuters Breakingviews) - Private equity has made the first call on another round of consolidation in Europe’s telecoms sector. KKR, Cinven and Providence Equity Partners on Monday unveiled a 3 billion euro ($3.3 billion) offer for Spain’s MasMovil. The bid is a welcome intervention for rivals like Telefonica, who will hope the buyout barons have less enthusiasm for the low-cost operator’s cut-throat pricing. For mergers and acquisitions fans, the timing is also propitious.

The consortium’s offer of 22.50 euros per share represents a 20% premium to MasMovil’s closing price on Friday. That’s tidy, given that shares in the number four Spanish operator had already risen from a trough of 12.7 euros in mid-March, during the depths of the coronavirus crisis. However, at roughly 8 times this year’s forecast EBITDA, it’s far from overly generous. The UK’s O2 network, owned by Telefonica, fetched a multiple of 7.5 times last month when it hooked up with cable operator Virgin Media.

For 22 billion euro Telefonica, a change of ownership at MasMovil should bring some relief. The Spanish market leader had a torrid time fending off its rival’s bargain-basement pricing. Telefonica’s operating margin shrunk to 9.4% last year, from 14.4% in 2017. Under pressure to finance the deal and earn a return for their investors, MasMovil’s prospective new owners may not want to push price wars too aggressively.

The deal already has the support of 30% of MasMovil’s existing shareholders, including Providence’s 9% stake, putting it on the way to success. However, investors clearly think sweeteners might be coming down the line. MasMovil shares were trading slightly higher than the offer at 22.8 euros on Monday morning.

Chief Executive Meinrad Spenger had always been rumoured to fancy a deal with Vodafone’s Spanish unit. That was deemed off-limits with European competition regulators because it would have reduced the number of Spanish players from four to three. However, a decision last week by the Luxembourg-based General Court, overturning the European Commission’s decision to block UK operator Three’s bid for O2 in 2016, has changed the landscape. In essence, the ruling will make it harder for Competition Commissioner Margrethe Vestager to nix “four-to-three” deals in future. KKR and its colleagues may have timed their call to perfection.


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