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Orange’s €18.6bn Merger with MásMóvil

By Kayla Ho, Michele Silvestri and Jia Jian Gan (LSE), Sonia Andrzejuk, Argyro Charizona, Mikołaj Borowiak and Vlad Marcu (Bocconi)

Photo: Sigmund (Unsplash)


Overview of the deal

Acquirer: Orange (ORAN.PA)

Target: MasMovil (MMBMF.PK)

Total Transaction Size: €18.6 billion (Orange: €7.8 billion, MasMovil: €10.9 billion)

Closed date: Q3 2023

Target advisor: Lazard, Citi

Acquirer advisor: Goldman Sachs, JP Morgan

Orange (ORAN.PA) and MasMovil (MMBMF.PK) have signed a binding agreement to combine operations in Spain to create the country’s biggest telecommunications company by number of clients, valuing the merged entity at close to €18.6 billion. The new company will take the form of a 50-50 joint venture and is claimed to ease market pressures and establish a stronger market number two to incumbent Telefonica. A €6.6 billion debt package will finance the transaction, and will include a €4.2 billion upstream payment to Orange, to make up for its lower valuation as compared to MasMovil, given its higher level of debt.

The synergies from the deal are expected to reach at least €450 million annually by the fourth year after closing the deal. The new combined entity will be able to accelerate investments into 5G and fibre connection and will create a sustainable player with the financial capacity and scale to continue investing to foster infrastructure competition in Spain for the benefit of consumers and businesses.

“I look forward to creating this joint-venture with MASMOVIL, building on our existing successful collaboration, to become a stronger player capable of making the investments required to develop the Spanish market. I know I can count on Jean-François Fallacher and the entire ORANGE Spain teams for their full mobilization until the closing in order to make this deal a success.” - Stéphane Richard, Chairman and CEO (Orange)

Company Details (Acquirer - Orange)

Orange S.A. is a French multinational telecommunications corporation, controlled by the French state through a 23% stake. Orange España is one of its subsidiaries and a mobile network operator in Spain. It was previously known as Amena, until 2005, when it was bought by France Télécom. The company, one of the four major mobile phone providers in Spain, also offers TV and Internet services.

Founded in 2006, headquartered in Pozuelo de Alarcon, Spain

CEO: Jean-Marc Vignolles

Number of employees: 5,400

Market Cap: €25.6bn (as of 20/01/2023)

EV: €60.0bn

LTM Revenue: €43.0bn

LTM EBITDA: €11.9bn

LTM EV/Revenue: 1.40x


Company Details (Target - MasMovil)

MasMovil is one of the leading Spanish telecommunications players, operating as a mobile virtual network operator (MVNO). MasMovil does not have its own network infrastructure, but instead purchases wholesale network access and resells them to customers. The company’s growth has stemmed from multiple takeovers of other MVNOs and its diversified product offerings in addition to traditional mobile packages such as financial services (MoneyGO). MasMovil's parent is London-based Lorca JV Co, a holding majority owned by buyout funds KKR, Providence and Cinven.

Founded in 1994, headquartered in Alcobendas, Spain

Number of employees: >2,000

LTM Revenue: €2.5bn

LTM EBITDA: €949mn

2020 LBO Valuation: €5.3bn (acquisition by Cinven, KKR and Providence Equity Partners, November 2020)

Net Debt: €6.4bn

LTM Net Debt Leverage: 5.2x

Net Debt/EBITDA: 6.7x

Senior Secured Net Debt LTM Leverage: 4.3x

Projections and Assumptions

Short-term consequences

The merger of Orange and MasMovil in the form of a 50-50 joint venture co-controlled by both companies has the potential to bring important short-term consequences to the telecommunications market in Spain. The immediate focus of the joint venture will be to take advantage of efficiency gains by investing in FTTH (Fibre To The Home: fibre-optic access solutions designed for residential deployments) and 5G infrastructure across the country. New opportunities will be built upon Masmovil’s experience in offering services such as 100% green energy, e-health, home security and personal finance services for residential, businesses and wholesale. Additionally, sustainability and sustainable development represents one of the main priorities of the newly formed joint venture. The merger of the second and fourth largest telecoms operators respectively leaves third-ranked Vodafone stranded, and is expected to test the European Commission's appetite for consolidation, as it has previously opposed deals that reduce the number of players from four to three in major markets. Due diligence conducted since March shows potential synergies in excess of €450mn per annum to be reached by the fourth-year post closing.

Long-term Upsides

Owing to harsh market conditions at present, providers in the European telecommunications sector have been engaged in price wars, subsequently facing suppressed profits. Orange, in particular, has struggled due to its inability to differentiate itself from its competitors within the Spanish market. The merger between Orange and MasMovil is expected to benefit Orange by allowing it to consolidate its financials and position itself strategically in the market. Currently, the market is shared between an oligopoly constituted by four companies: Telefonica’s Movistar, Orange, Vodafone, and MasMovil, which represent 28.24%, 22.91%, 22.26% and 20.55% of the market respectively. A merger between the second and fourth-largest businesses in Spain will provide the combined entity with a sizable market share and an opportunity to leverage on great economies of scale.

The business can also invest in Research & Development (R&D) as part of its plan to expand its FTTH and 5G networks, allowing Spain to maintain and expand its competitive telecom infrastructure. The agreement between the parties also includes a right to trigger an IPO under certain conditions for both parties after a defined period and, in such a scenario, an option for Orange to take control of the combined entity at IPO price. Post-closing, Orange and MasMovil’s parent company have agreed upon a leverage target of 3.5x net debt/EBITDA ratio to facilitate such an IPO of the JV, that may generate additional cash flows to strengthen the group’s financials.

Risks and Uncertainties

The most foreseeable uncertainty is whether the merger would clear regulatory approvals. Spain's mobile market is a four-way fight amongst the top few players previously mentioned. It is only logical that any merger at this scale would be subject to approval from EU antitrust authorities. The European Commission's response will reveal whether it is willing to favour a market structure with fewer operators and potentially higher investments on infrastructure - as lobbied for by industry - or if it will stick to a consumer-centric stance marked by fierce competition and low prices.

Another uncertainty is the fruition of potential synergies. Telecommunications is a heavily technical field, and only expert analysis can reveal the scope of potential synergies. The private status of MasMovil only makes such analysis more difficult. Nonetheless, high CAPEX levels in the telecom industry will likely mean large synergies in cost-sharing of digital network infrastructure. Moreover, a merger can lower costs of implementing advanced networks like 5G. However, the two companies that were previously separate may experience duplicating business functions that need to be efficiently streamlined. Given that the new management team post-merger will include executives from Orange and MasMovil, the incentive to retain overlapping functions may increase overall costs and decrease long-run profitability.

On the demand side, this merger will enable the combined entity to control the largest market share in Spain. A potential benefit is that customers may become increasingly loyal to the merged entity, eventually driving out competitors. MVNO industries are known to be heavily dominated by key players, with 86% of UK customers being with the top 6 MVNOs. Hence, the most negligible risk is stable demand over time, given the trend of market dominance in the long run in the MVNO industry.

“To assure leading telecom infrastructure in 5G and FTTH as well as outstanding service in Spain, we need strong operators with sustainable business models. The combination of ORANGE and MASMOVIL would be beneficial for the consumers, the telecom sector and the Spanish society as a whole.” - Meinrad Spenger, CEO (MasMovil)


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