Spanish telecos will enter the ‘post-merger’ commercial struggle with high debts

Update Post: November 28, 2023 10:39 am

More commercial toughness… but with moderation to continue paying interest. Analysts assume that the dance of operations in the telecommunications sector, with the merger of Orange and Másmóvil and the consequent ‘remedies’ foreseeably granted to Digi and the sale of Vodafone, the battle is going to intensify, not only in the residential segment but also in the wholesale segment. But the majority suggests that the high indebtedness of large firms will represent an important restraint that will mark the level of aggressiveness.

Telefónica’s own CEO, Ángel Vilá, admitted at the operator’s ‘Investor Day’ that served to present the roadmap for the next three years that they did not expect a major disruption in the wholesale market. And one of the reasons he gave pointed precisely to the balance of the great actors. “The three big players are also heavily indebted at a time of high interest rates that could be higher and for longer; so we expect financial rationality in the behavior of these players,” he pointed out. This could also be transferred to the consumer segment, where Digi has also significantly increased its liabilities in the midst of deploying its own network.

The Zegona transaction will involve significant indebtedness for Vodafone Spain, which is one of the most feared players due to its need to grow significantly in the market. In the documentation provided to the market it was established that the total financing package of up to 4,200 million euros in different ‘packages’ would imply a ratio of almost 3 times the gross operating result (Ebitda) for the year. But this was assuming that they would raise an ‘extra’ 600 million in capital. In the one that just closed last week they added 300 million. They will need twice as much to maintain that proportion, which could therefore rise. This involves a payment of relevant interest.

Zegona itself dedicates a long chapter in the risks of the brochure presented to investors to the financial situation and the effects of this debt on its planes. He insists that the different agreed credit lines – which could be refinanced in the future – will contain “a series of financial and restrictive clauses and other provisions that will limit Vodafone Spain’s ability to operate its business.” In this sense, they mention, for example, the difficulty in addressing mergers or a “substantial change” in the company’s business; to carry out asset disposals or additional indebtedness or make acquisitions and investments.

In the case of the joint venture of Orange and Másmóvil, the debt is also high. It must be taken into account that the joint venture of the second and fourth operator incorporates the debt of the latter – which would be below 6,000 million euros after the divestments of the Euskaltel network, accesses in rural areas and the sale of the Portuguese subsidiary (still pending regulatory authorization) -. To this we must add the 6,000 million ‘extra’ liabilities that will serve, mainly, to pay an asymmetrical ‘megadividend’ and thus adjust the valuations of both (Orange contributes its assets without financial burdens). The ratio would be between 5 and 6 times Ebitda.

The most feared actor in this contest is, without a doubt, the Romanian Digi. Everything indicates that the forced sale of assets that will imply the regulatory ‘green light’ for the Orange-Másmóvil merger will have them as beneficiaries. But in addition to this purchase, the firm has committed to a strong investment for its own network, in addition to what has already been executed. The firm has been raising financing, both in Spain and in the parent company, which has increased the group’s net debt to exceed the barrier of 1,300 million (30% more). This would mean about 2.7 times Ebitda. This is 0.5 points more than just a year ago (maturities skyrocket in 2025 to 600 million euros compared to 110 million next year). It still has room and therefore has the capacity to continue being the ‘loose verse’ although with greater weight in the backpack than just two years ago.

In the case of Telefónica, the new strategic plan forces it to continue being the one that calls for the “rationality” of the market. Not only in the residential market, where it will lose the title of main operator by number of customers in favor of Orange-Másmóvil, but also in the wholesale market. The roadmap is based on a reduction in the debt to Ebitda ratio to a maximum of 2.2 times. At the end of September it was slightly above 26.5 billion euros (2.5 times). This, together with the obligation to increase income by 1% annually, leads to a greater conservative profile. The CEO himself has been talking for several quarters about a progressively calmer market.

Room for aggression

Despite everything, the actors are prepared for greater commercial aggressiveness, especially in the consumer segment. Also in the wholesale area, where Zegona wants to give much more prominence to Vodafone – who chose to practically close its mobile network and rule out renting it to third parties. This would come after several quarters in which, with some exceptions, there has been a certain stabilization in the rates of the highest value products and growing activity in the ‘low cost’ segment.

Digi has no intention of stopping. His CEO already warned the market last year that his intention was not to touch prices, despite the rise in the CPI and the potential impact on his margins. There is still a lot of pressure on lower value packages with fiber and mobile at 20 euros. Vodafone has already said that it is going to give much more prominence to Lowi, its second brand for this vertical, providing it with a television offer. The year 2024 will be key. But the backpack of financial interests will also be.

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November 20, 2023 5:14 am