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An effective merger of broadband assets would mark the latest telco retreat from full infrastructure ownership but could stoke competition concerns.
Mergers are all the rage in Spain's telecom market. Not content with the recent marriage of Másmóvil and Orange, stakeholders in the resulting MasOrange now have their eyes on a fiber liaison with local rival Vodafone, itself owned by Zegona. It was described as a "fiberco" and "shared FTTH [fiber-to-the-home] network" in the pages of Orange's latest earnings report, out today, but looks more like a retail-oriented joint venture (JV), judging by earlier press reports and comments by senior Orange and MasOrange executives on today's earnings call.
The latest venture would cover about 11.5 million Spanish premises and serve around 4 million customers. But this is only part of the total fiber footprint and combined customer base. Across all available infrastructure, full-fiber lines today reach about 17 million Spanish homes, while MasOrange serves around 6.8 million fiber customers, according to Meinrad Spenger, MasOrange's CEO. A lot is being excluded from the planned JV, which has no intention of building much new fiber. Nor, according to press reports that originated with Spain's Expansión newspaper, will this so-called fiberco open its network to other retailers.
"To give you hints on the reason for the netco, Spain is a very competitive market not only in retail but also in networks," Spenger told analysts on today's call. "We have a lot of fibercos and MasOrange wants to be at the forefront of possible consolidation in this market and play an active role." Maintaining ultimate control and deleveraging are priorities. But Spenger played down the suggestion MasOrange would be able to shift the customers it serves via other broadband networks, such as that of Spanish incumbent Telefónica, to the new fiberco. "That is not the main focus," he said.
Asset stripping
Meanwhile, the decision about which assets are included in the fiberco and which are left out seems to have been based on an examination of footprints and overlap between them. "On the JV, you are right that 11.5 million lines means we will not move all the fiber infrastructure from MasOrange in this fiberco," said Christel Heydemann, Orange's CEO, in response to a question from a UBS analyst. "So we've been agreeing on geographic parameters, which are the ones where we think we bring more value because this is where we have strict overlap between Vodafone Spain's cable and fiber infrastructure as well as MasOrange's infrastructure."
Under the proposal, MasOrange would retain a 50% stake in the new venture, while Vodafone holds 10% of it. This means the other 40% would be sold to institutional investors, with Expansión reporting that stake could fetch between €1.5 billion (US$1.6 billion) and €2 billion ($2.2 billion). "We plan to crystalize the value of this fiberco by letting a financial investor enter the capital of the JV," said Heydemann on today's call. It would accordingly receive "a significant cash upstream that will accelerate the company's deleveraging."
Net debt at Orange comes to about €23 billion ($24.9 billion) and has fallen from €27 billion ($29.3 billion) a year ago, largely thanks to cash proceeds Orange received when MasOrange was created. But asset stripping, for want of a better description, has become the best way for slow- or no-growth European telcos to combat debt. That said, Orange seems more determined than some of its peers to retain large stakes in whatever it spins off. Totem, the towerco it created more than three years ago, remains fully owned by Orange.
The question is whether regulators see the fiberco tie-up with Vodafone as merger by stealth and raise the usual concerns about the effect of that on competition. If the plan, as Zegona said in its own statement, is "to provide fiber access services to both companies within this footprint" but not open the network to others, the fiberco will not generate new wholesale competition for all retailers. And the retail options for Spanish customers would presumably shrink in areas where the fiberco is active.
Unexciting figures and AI
The update came as Orange reported the usual so-so results for its second quarter. Sales edged up around 1% year-over-year, to nearly €10 billion ($10.8 billion), while Orange's preferred profitability metric of EBITDAaL (earnings before interest, tax, depreciation and amortization, after leases) rose 2.6%, to about €3.1 billion ($3.4 billion). The main takeaways are that France is flat, Europe is shrinking and Africa remains the company's growth engine, reporting a sales increase of 10.3%, to nearly €1.9 billion ($2.1 billion), and EBITDAaL growth of almost 15%, to more than €1.4 billion ($1.5 billion).
Nobody outside Africa ever feels much excitement about these numbers. Orange's share price was up about 1% at noon in Paris but is at roughly the same level it was a year ago and down 26% since August 2019. For all the bold executive talk on Orange's "Lead the future" strategic plan, most equity analysts – when not enquiring after the new JV – trotted out their usual boring questions about such commercial arcana as front book and back book pricing.
As for artificial intelligence, the tech topic of the day, Orange's main sales hope seems to be that AI's Big Tech sponsors will pay it for any infrastructure it needs to build to support AI services. With things like "real-time translation," the industry must still figure out "whether there will be a need for compute in the handset, in the core of the network, in the hyperscalers' networks or even, eventually, at the edge of our networks," said Heydemann. "This is a broader debate linked to fair share."
Fair share, to clarify, is the argument content companies such as Amazon, Google and Netflix should contribute to network costs because it is their applications that chew up capacity. But there is scant evidence any capacity crunch is driving up headline costs, with Orange guiding for capital intensity (expenditure over sales) of 15% this year, down from about 17% in 2020. And as critics point out, without those applications there would be little need for networks.
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