Orange Telecom made an offer for 100% of Jazztel shares at €13 per share in cash, which values Jazztel at €3.4bn ($4.40bn). The acquisition will be financed through a combination of hybrid bonds and a capital increase of up to €2bn at Orange.
Reuters
|
|
France’s Orange has reached a deal to buy Spanish fixed line telecoms operator Jazztel in an effort to bolster its mobile operation in the country and better compete with rivals Telefonica and Vodafone.
The French group made an offer for 100% of Jazztel shares at €13 per share in cash, which values Jazztel at €3.4bn ($4.40bn). The acquisition will be financed through a combination of hybrid bonds and a capital increase of up to €2bn at Orange.
The agreement is subject to regulatory approval and to winning the backing of at least 50.01% of shareholders on top of the 14.5% of the shares that Jazztel Chairman Leopoldo Fernandez Pujals has already agreed to sell.
Jazztel shares rose 6% to €12.75. Orange fell 1.2% 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 €7.2bn, 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 1.5mn 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 €1.3bn 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 amortisation (EBITDA) after cost savings, or a 34% 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.
The offer also means Jazztel will not be pushing ahead with the potential acquisition of TeliaSonera’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.
“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 €2bn rights issue, it would represent a 6.7% 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 fibre 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 minimise 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 signalled yesterday 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.