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 The French group made an offer for 100 percent of Jazztel shares at
13 euros per share in cash, which values Jazztel at 3.4 billion
euros($4.40 billion). The acquisition will be financed through a
combination of hybrid bonds and a capital increase of up to 2
billion euros at Orange.
The agreement is subject to regulatory approval and to winning the
backing of at least 50.01 percent of shareholders on top of the 14.5
percent of the shares that Jazztel Chairman Leopoldo Fernandez
Pujals has already agreed to sell.
Jazztel shares rose 6 percent to 12.75 euros. Orange fell 1.2
percent because of the share issue plan.
"We are doing this deal to accelerate our growth in Spain,
particularly in fixed-mobile convergent offers," Orange Chief
Executive Stephane Richard said.
"The new company will be the incontestable number two in fixed
services and third in mobile behind Vodafone, but we think we'll be
able to take second place pretty quickly."
Consolidation in the Spanish telecoms sector has been brewing for
months, driven by tough competition and falling prices in a deep
recession.
When number two mobile operator Vodafone Group agreed to buy cable
operator Ono in March for 7.2 billion euros, Orange found itself
isolated without a fixed-line network. Leader Telefonica has
increasingly pushed discounted bundles of fixed and mobile services
to keep customers loyal.
Buying Jazztel would give Orange about 1.5 million broadband
subscribers and help it match competitors' fixed, TV and wireless
packages. It plans to keep both brands since Jazztel's image is
stronger among budget-conscious customers.
Orange said the deal would add to earnings per share and operating
free cash flow by 2017, and would help it save 1.3 billion euros
mostly through network efficiencies. Jazztel now rents capacity on
Orange's network to provide mobile service.
Some analysts questioned the price. Orange valued Jazztel at 8.6
times 2015 earnings before interest, tax, depreciation, and
amortization (EBITDA) after cost savings, or a 34 percent premium to
Jazztel's average share price in the past month.
Raymond James said Orange paid 12 times 2015 EBITDA before
synergies, higher than sector take-out multiples of 8-9 times.
"While we believe Orange has achieved the unlikely feat of making
Vodafone's bid for Ono look relatively inexpensive...we regard the
deal as constructive for the Spanish market," Citigroup analyst
Simon Weeden wrote in a note.
YOIGO OFF TABLE
The offer also means Jazztel will not be pushing ahead with the
potential acquisition of TeliaSonera AB's Yoigo, Spain's smallest
mobile player. Last week, Jazztel said it was in preliminary talks
with Yoigo.
Orange had also been weighing a bid for Yoigo, which parent
Teliasonera wants to sell because it is subscale. But a move for
Yoigo was no longer in the cards, Orange's Richard said.
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"Today we don't need to acquire Yoigo and we will focus on the
combination of Orange and Jazztel," Richard said on a call with
analysts. "But we support consolidation in general and if we can
play a role later on, then we will consider it.
By paying for Jazztel in part through a capital increase, Orange
stuck to its target for net debt of no more than 2 times operating
profit by year end. If it carried out the maximum 2 billion euro
rights issue, it would represent a 6.7 percent dilution for
shareholders, according to Raymond James.
Orange acknowledged it was being conservative by opting for a
capital increase instead of debt. Moody's and Fitch credit rating
agencies put Orange on negative outlook in January over concerns
about falling profitability in its key French market.
"We don't want to take any risk [with agencies] or put pressure on
our capacity to deliver on fiber broadband investments at home,"
Orange finance chief Ramon Hernandez said.
Richard said Orange would try to keep the capital increase as small
as possible to minimize shareholder's dilution.
Orange expects the deal to close in the first half of 2015. Richard
said competition regulators would subject the deal only through a
shorter "phase one" review, which apply only to those with lesser
impacts on the market.
Spain's Industry Minister Jose Manuel Soria signaled on Tuesday that
the government viewed deal-making as a positive. "The consolidation
process leads to fewer operators, which will have more muscle to
invest in ... networks and will improve offers to consumers," Soria
said on radio station RNE.
Bank of America Merril Lynch advised Orange on the deal.
(1 US dollar = 0.7727 euros)
(Additional reporting by Gwenaelle Barzic and Robert Hetz; Editing
by James Regan, Greg Mahlich, Andre Grenon and Susan Thomas)
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