Spanish telco M&A piles pressure on Vodafone

Nick Read’s deal-making options just got a whole lot narrower. The Vodafone chief executive and full-throated advocate of consolidation in Europe’s telecoms markets has been left out in the cold by a proposed 19.6 billion euro merger in Spain. The pressure is now on him to make a move in Italy or the UK.

Ever since it was gobbled up by private equity giant KKR in 2020, MasMovil has been at the centre of merger rumours in the hyper-competitive Spanish market. After Tuesday’s announcement, it looks likely that Spain’s number four operator will pair up with French player Orange’s Spanish unit. Combined, the pair will be a close second to former monopoly Telefonica.

The proposed deal gives MasMovil and Orange an equal share in the new entity. The KKR-owned group is larger, valued at 11.5 billion euros including debt, versus Orange’s 8.1 billion euros. But it also brings with it more than 6 billion euros of borrowing, and so will pay the French company a dollop of cash, estimated at 1.5 billion euros by Breakingviews, to keep a 50% stake. The bigger prize for both is the 450 million euros of estimated annual savings. Taxed and capitalised, those are worth nearly 1.7 billion euros apiece today, equivalent to 6% of Orange’s market value.

There are risks. European watchdogs have objected to deals that reduce the number of large players in any one market from four to three. Approval might come with tough remedies. That said, if the deal does go through, all operators in Spain, including Vodafone, should gain from less competitive pricing.

That may be little consolation for Read. He is under pressure from shareholders including activist Cevian to streamline his sprawling group via M&A. He will now miss out on a slice of merger synergies, and has few options to get out of Spain, other than perhaps a sale to private equity – unlikely to be as lucrative as a merger with a rival. Hence why Vodafone shares lost more than 3% on Tuesday.

Read will now need to put his money where his mouth is elsewhere. He spurned a cheeky approach from French rival Iliad in Italy last month. Turning the tables on its owner Xavier Niel is one option. Cobbling together a deal with CK Hutchison-owned Three in the UK is another. But with time and options not on his side, there’s an added risk of overpaying. Reuters