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 The British group said on Monday it would use some of the $130
billion proceeds from the sale of its U.S. arm to acquire Ono, with
a superfast cable network and 1.9 million customers, to create a
stronger challenger to market leader Telefonica.
The deal for private equity-owned Ono is Vodafone's third purchase
of a European fixed-broadband asset in two years, following similar
moves in Britain and Germany, enabling it to offer fixed-line and
mobile services, pay-TV and broadband, while saving money on
building and operating its networks.
The agreement, which comes as the French market undergoes a similar
transformation, could also spark more consolidation within Spain as
players such as France's Orange seek out acquisitions to avoid
falling behind.
Orange has been linked with Jazztel, Spain's fourth-biggest telecoms
operator, while Yoigo, owned by Sweden's Teliasonera, is also seen
as a likely target, analysts say.
Shares in Vodafone were up 1.4 percent in midday trading,
outperforming the FTSE 100 index, and shareholders have generally
been supportive.
"Historically, Vodafone has been a pure mobile operator," Henri
Tcheng, a partner at consultants BearingPoint said. "But the future
of telecoms includes convergence between very high-speed broadband,
mobile and fixed so I would describe this as a compulsory move for
Vodafone.
"It is quite a high valuation, but in any given country the cable
operator is in a unique place for mobile operators. So even if it is
expensive, it is not a bad deal."
Ono, which had been in the process of preparing for a stock market
flotation, has 1.9 million customers on its network that covers 70
percent of Spain, or 7.2 million households out of a total of around
16 million.
Having built the network later than other cable and telecom
companies, Ono can achieve broadband speeds of up to 200 megabits
per second, or up to 20 times the average of rival networks.
And its footprint in more rural areas fits well with the super-fast
network Vodafone is currently co-building with Orange in major
cities including Barcelona and Madrid. Vodafone said on Monday it
would not commit to a second stage of the rollout with Orange.
The British group, which is ramping up spending on its European
networks to boost speeds, said the deal would enable it to save
around 240 million euros per year, before integration costs, by the
fourth full year after completion.
It also expects to generate revenue of around 1 billion euros as it
seeks to cross-sell its mobile offering to Ono's cable customers,
and vice versa.
STABILIZE THE MARKET
The planned savings and the appeal of the superfast network, which
will also enable the British group to offload some of its mobile
traffic and stop paying so much to rent lines from Telefonica,
helped soften the blow of the hefty multiple the group is paying
compared with typical telecoms valuations.
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A 7.2 billion euro price tag implies a multiple of 10.4 times the
target's operating free cash flow, broadly in line with recent deals
in the European cable sector.
But it is almost double the 4 billion euro value assigned by bankers
to Vodafone's current mobile business in Spain, which with almost 14
million customers at the end of December dwarfs its new acquisition.
"Vodafone has seen revenues and core earnings from its Spanish
operation decline by an aggregate of 38 percent and 60 percent
between 2010 and 2014 estimations," Jefferies analyst Jerry Dellis
said in a note to clients.
"Securing a more credible fixed to mobile convergent offering on a
faster timescale than a self-build could deliver is vital to
stabilizing that momentum."
According to the Spanish regulator, Vodafone had almost 25 percent
of the mobile market, and the deal which includes Ono's 1.1 million
mobile customers is likely to increase that by almost 2 percentage
points. Orange has around 23 percent of the market.
In the provision of fiber, Vodafone would now be number one.
Analysts said they expected regulators to approve the deal without
requiring Vodafone to make any concessions.
The deal for Ono will be financed from existing cash resources and
committed but undrawn bank facilities. Morgan Stanley advised
Vodafone on the deal while Deutsche Bank acted as the lead financial
adviser to the shareholders of Ono.
Ono is 54 percent owned by investment funds Providence Equity
Partners, Thomas H. Lee Partners, CCMP Capital Advisors and
Quadrangle Capital.
($1 = 0.7181 euros)
(Additional reporting by Robert Hetz and Sarah White in Madrid;
editing by David Holmes and Erica Billingham)
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