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Orange Spain and MásMóvil announced this Tuesday the start of exclusive negotiations to merge 50% of their activities in Spain within approximately one year and with a business value of 19,600 million euros. As you have been able to collect the Economistthe first executive of the company will be Meinrad Spenger, current CEO of MásMóvil, who will try to lead the IPO of the resulting group in the horizon of 2025, always depending on market conditions.

The two telecommunications groups expect to agree on all the terms of the transaction before next summer and formalize the union in the second quarter of 2023subject in particular to the approval of the competent administrative, regulatory and competition authorities.

The resulting entity, which will take the form of a joint venture, will be controlled 50% by Orange Spain and MásMóvil, with an Orange valuation of 8,100 million euros (7.5 times EBITDA in 2022), while the valuation of MásMóvil (including Euskaltel) stands at 11,500 million euros (9.9 times the EBITDA of 2022). With these magnitudes, it is assumed that Orange will have to make compensation to MásMóvil to balance the market value.

Both Orange Spain and Lorca JVCO, a company that controls the MásMóvil group, expect to enjoy identical voting rights in the future teleco, so that neither of the two companies will be able to consolidate the results of the combined entity in their accounts.

The same sources specify that the agreement between the parties contemplates the right to launch a Public Offer for Sale (OPV) under certain conditions agreed by both parties and Orange’s right to take control and consolidate the resulting combined entity in the event of a Public Offer for Sale. However, in no event would Orange be required to exit the resulting combined entity or to exercise those options.

The new operator would become the new Spanish leader by number of lines, but still far behind Telefónica in revenue and EBITDA

According to current market data, the Joint Venture would integrate the assets and equipment of both companies in Spain, with businesses that the two protagonists of the merger consider “highly complementary”, to provide service to more than seven million customers from broadband and fixed telephony (4 and 3.1 million subscribers, respectively), of which 5.6 million (3+2.6) are convergent. They also exceed 20.2 million (11.5+8.7 million) postpaid mobile customers and almost 1.5 million TV customers. With these magnitudes, the operator becomes the new Spanish leader in telecommunications by number of fixed, mobile and retail fixed broadband accesses, ahead of Telefónica. According to data from the CNMC corresponding to last December 2021, the sum of Orange and MásMóvil mobile lines will reach 24.2 million connections, compared to 15.9 million for Telefónica and 12.4 million for Vodafone.

At retail fixed broadband businessthe ‘joint venture’ of Orange and MásMóvil would surpass Telefónica by a very small difference. Specifically, the sum of the two operators reaches 6.8 million connections, compared to 5.8 million for Telefónica and 3 million for Vodafone Spain, according to data from the CNMT corresponding to the end of last year.

The expected synergies are expected to exceed 450 million euros within three years

The merger of companies, which materializes the consolidation run with which the Spanish telecommunications sector has lived for years, also adds 16 million real estate units passed through fiber optics and a mobile phone network, including 5G, with a presence throughout the national territory.

Likewise, the resulting entity will enjoy revenues of 7,500 million euros and an EBITDA of 2,200 million euros, with sufficient muscle to face the necessary investments in fiber optics to the home (FTTH) and 5G. These magnitudes are behind Telefónica, whose revenues in 2021 stood at 12,000 million and EBITDA at 4,700 million euros.

The estimated synergies are expected to reach 450 million euros from the third year after the closing of the operation. Orange’s financial advice has corresponded to Lazard, while Goldman Sachs Bank Europe has done the same with Másmóvil, who has also been helped by BNP Paribas as a debt advisor.

What about the brands?

To date, no decision has been made regarding the brand resulting from the merger or the survival of the numerous brands of both companies, some of them clearly overlapping in the different segments of the mobile market. Time will have to make decisions, although both companies already have market reports to support the possible variations of commercial headlines. On the part of the Másmóvil group, in addition to MásMóvil, the brands Yoigo, Euskatel, R Telecomunicaciones, Telecable, Pepephone, Llamaya, Lebara and HitsMobile. On the Orange side, in addition to Orange, Jazztel and Simyo.

Stéphane Richard, President & CEO of Orange congratulated himself for having contributed to “creating this Joint Venture with MásMóvil, taking advantage of our long and successful collaboration to become a stronger competitor, capable of making the important investments necessary to fully develop the Spanish market “. For this new stage, the CEO of the French group claims to have Jean-François Fallacher, current CEO of Orange Spain, as well as the commitment of the entire team of the Spanish subsidiary “to turn this opportunity into a success for both companies.”

For his part, Meinrad Spenger, CEO of MásMóvil, points out that “to ensure leadership in fiber and 5G infrastructures, as well as the provision of an exceptional service in Spain, we need strong operators with sustainable business models.” The combination of the two groups – he adds – “would be beneficial for consumers, the telecommunications sector and Spanish society as a whole.”

New map of the ‘telecos’

If the joint venture materializes under the terms indicated, the Spanish map of telecoms will be dominated by Orange-MásMóvil, which will displace Telefónica to second place in the ranking. In the same way, Vodafone Spain retains third place, but falls short of the leading group and with little chance of competing for hegemony with the new benchmarks in the business. The Vodafone group, through the multinational’s chief executive, Nick Read, has recognized on several occasions the need for consolidation in the Spanish market, as well as market surveillance to take advantage of market opportunities that allow the subsidiary’s value to be increased Spanish.

Will there be remedies?

The eyes of the market now point to the possible ‘remedies’ (remedies or compensation) that the competition authorities will impose to authorize an operation that reduces the number of the big players to three: Orange-MásMóvil, Telefónica and Vodafone. As usual in this type of merger, the new fourth operator could receive radio frequencies or infrastructure assets, as happened seven years ago with MásMóvil after the purchase of Jazztel by Orange. Contrary to what happened in 2005, the Community officials for Competition have softened their positions to allow for consolidations in a sector always in need of high investments. For that reason, market observers do not expect onerous compensation. However, if these remedies occur, Digi is positioned as the fourth group in the market and, therefore, as a potential recipient of any advantageous conditions that may arise.

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