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FT Takes on Telefónica

Light Reading
News Analysis
Light Reading
7/27/2005

France Telecom SA (NYSE: FTE) announced its anticipated cross-border raid this morning, saying it is paying €6.4 billion ($7.7 billion) in cash to Grupo Auna for an 80 percent stake in its Spanish mobile operator Amena (see France Telecom Buys Amena and Eurobites: So Shrink Me).

The French incumbent plans to combine the mobile operations with its existing Spanish Wanadoo SA broadband business as part of its NExT (New Experience in Telecom services) strategy to operate converged fixed/mobile operations in key target markets under the Orange brand (see Eurobites: Big Guns Fire Salvos and France Telecom Launches NExT).

"I am pleased to announce today, together with our Spanish partners, the creation of a first tier challenger in Spain to offer convergent services to our clients, both individuals and enterprises," stated FT's CEO Didier Lombard in a prepared statement. "Spain will be an active platform for the launching of innovative services and will benefit from the strength of the Group at the European level. The merger of France Telecom España and Amena confirms our strategy as an integrated European operator and allows us to accelerate the implementation of the NExT plan."

Auna's current owners -- Grupo Santander, Endesa, Unión Fenosa, and some minority shareholders including some Spanish banks -- will own between 20 percent and 25 percent of the combined fixed/mobile operator, and have to retain that ownership for a minimum of three years. FT has the first right of refusal should those stakeholders decide to sell after that period.

FT sees Spain as one of Europe's growth markets: It believes there is annual growth potential of 6 percent in the mobile market and 10 percent in the data and Internet services market between now and 2008. The acquisition puts it head to head with Spanish incumbent Telefónica SA, which dominates the fixed and mobile markets. Amena is the third largest wireless operator in Spain, behind Telefónica Móviles SA and Vodafone Spain.

The Amena acquisition, which will be part funded by a €3 billion ($3.6 billion) share issue, gives FT 9.7 million mobile customers, a 24 percent market share, to add to its existing 2 million fixed line customers. Of those fixed line customers, 1.4 million are Internet access subscribers, of which 526,000 are broadband users, giving FT a 16 percent share of the DSL market.

On March 31 this year, Telefónica had 19.1 million mobile customers in Spain and 2.1 million DSL users.

The combined business is on track to generate €4.1 billion ($4.9 billion) in revenues and €1.2 billion ($1.4 billion) in operating profits in 2005, according to FT. The carrier aims to boost its Spanish revenues by between 7 percent and 8 percent per year during the next three years, and by 2008 it plans to have more than 14 million customers in total.

The French operator believes the acquisition will boost its earnings per share (before amortization of goodwill) after the initial 12 months.

Investors were clearly happy with the deal as FT's share price rose by €0.50, more than 2 percent, to €24.87.

And analysts at Lehman Brothers also favored the deal. In a research note issued this morning, analyst James Britton said this was "a good example of sensible strategic M&A. [The] price is reasonable for a high quality asset in an attractively structured market, and it is reasonable to assume FT can extract material synergies through the Orange platform."

Britton adds that the deal is "also consistent with FT's acquisition criteria," as it enhances group growth, maintains the operator's debt ratio, will add free cash flow and earnings after 12 months, and "complements FT's integrated operator strategy. We expect the market will reward this deal" once any concern over the new shares issue fades away.

The deal leaves Auna still holding its cable assets, though this is expected to be acquired for about €2.2 billion ($2.7 billion) by Spain's other main cable operator Ono, which has formed a consortium with a number of private equity firms.

FT isn't the only Tier 1 European operator looking to take a stake in the continent's key markets: Telecom Italia SpA (NYSE: TI) is making a big broadband push in France and Germany (see Italians Prep Big French DSL Rollout and Italians Invade Germany); Telefónica has operations in Germany and recently acquired Cesky Telecom a.s. (see Telefonica Buys Cesky Telecom); Deutsche Telekom AG (NYSE: DT) has broadband and mobile businesses in a number of leading markets in Western and Eastern Europe (see T-Online Makes Spanish Acquisition); and BT Group plc (NYSE: BT; London: BTA) has been building its presence in the business services sector (see M&A Activities Firm Up BT Global).

— Ray Le Maistre, International News Editor, Light Reading

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