(Bloomberg) —
Orange SA and Masmovil Ibercom SA reached a binding agreement to combine their Spanish businesses to create the country’s biggest telecommunications company by clients after exclusive merger talks announced in March.
The transaction is based on an enterprise value of 18.6 billion euros ($19 billion), according to a statement Saturday. In March, the companies said the venture would have a combined enterprise valuation of 19.6 billion euros.
The new company will take the form of a 50-50 joint venture, co-controlled by Orange and Masmovil. The transaction is subject to approval from antitrust authorities and is expected to close by the second half of 2023.
The deal will test the willingness of European Union regulators to allow consolidation in telecommunications markets. Spain is currently one of Europe’s most competitive markets, with scores of different brands engaging into price wars. Large firms, such as Orange, Masmovil and Vodafone have previously warned that returns on capital are unsustainable at current levels.
The agreement includes a right to trigger an initial public offering under certain conditions for both parties after a defined period and also an option for Orange to take control of the combined entity at the IPO price, according to the statement.
The new combined company would be able to accelerate investments in fiber connection and 5G, the companies said, with total synergies expected to reach at least 450 million euros annually by the fourth year after closing the deal.
A deal between Masmovil and Orange is a blow to Vodafone, which was long touted as the most likely candidate to combine with Masmovil. But while Orange has the country’s second-largest fiber optic network, most of Vodafone’s broadband is offered through cable, making synergies more difficult.
The French carrier is second to Telefonica SA in Spain’s telecom market, with Vodafone as the third-largest operator. Masmovil, the fourth player, was delisted two years ago after a leveraged buyout by three private equity funds — Cinven Ltd, KKR & Co, and Providence Equity Partners LLC.
Since the buyout, Masmovil acquired another Spanish telecom firm, Euskaltel, and has been growing its presence in Portugal. It is already a major wholesale client for Orange, both in fiber and mobile networks.
The deal will be supported by a 6.6-billion-euro debt package that will finance a 5.85-billion-euro payment to Orange and Masmovil shareholders in favor of Orange’s to reflect different levels of indebtedness, according to the release. This debt package is mainly comprised of bank debt, provided by a large pool of banks, and Masmovil’s existing debt will remain in place.
(Updates with details on the deal and the Spanish telecom market.)
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