European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

The recent reforms incorporate "loyalty shares" as an option, which in practice come to transform the 'one share one vote' rule that prevailed in listed companies to protect equal voting rights of shareholders. The instrument equates the Spanish rules with those of other European Union countries, such as Germany, Italy, France or the Netherlands, among others, and aims to reward long-term investors, also protecting companies against short-term investors (opportunistic funds).
The Government toughens the takeover law before the arrival of 'loyal investors' on fear that hard core shareholders will take control of Spanish companies with the new double voting system.
According to the change in the regulation, an investor who exceeds 30% of the vote of a company listed due to the double voting rights of the loyalty shares, will have three months to decide whether to launch a takeover bid, reduce participation or waive its new political rights.
The Ministry of Finance discreetly introduces the change in the new Securities Market Law.
In Spain, the companies that establish the double voting system will be less prone to receiving a takeover offer. If it is already difficult to carry out an offer now without the support of the hard core nucleus on shareholders (for instance, MásMóvil has had to agree with those of <a href="https://www.smartkarma.com/entities/euskaltel-sa" target="_blank" data-smartkarma-citation="entities:21263:1" rel="noopener">Euskaltel SA (EKT SM)</a> ), it will be next to impossible under the new framework.

The recent reforms incorporate "loyalty shares" as an option, which in practice come to transform the 'one share one vote' rule that prevailed in listed companies to protect equal voting rights of shareholders. The instrument equates the Spanish rules with those of other European Union countries, such as Germany, Italy, France or the Netherlands, among others, and aims to reward long-term investors, also protecting companies against short-term investors (opportunistic funds).
The Government toughens the takeover law before the arrival of 'loyal investors' on fear that hard core shareholders will take control of Spanish companies with the new double voting system.
According to the change in the regulation, an investor who exceeds 30% of the vote of a company listed due to the double voting rights of the loyalty shares, will have three months to decide whether to launch a takeover bid, reduce participation or waive its new political rights.
The Ministry of Finance discreetly introduces the change in the new Securities Market Law.
In Spain, the companies that establish the double voting system will be less prone to receiving a takeover offer. If it is already difficult to carry out an offer now without the support of the hard core nucleus on shareholders (for instance, MásMóvil has had to agree with those of Euskaltel SA (EKT SM) ), it will be next to impossible under the new framework.

Loyalty Shares in Spain: Double-Voting Rights Could Hinder Takeovers

Telxius, a subsidiary of <a href="https://www.smartkarma.com/entities/telefonica-sa" target="_blank" data-smartkarma-citation="entities:21299:1" rel="noopener">Telefonica SA (TEF SM)</a> (50% Telefonica, 40% KKR, 10% Pontegadea) reached an agreement with Boston-based <a href="https://www.smartkarma.com/entities/american-tower-corp" target="_blank" data-smartkarma-citation="entities:6365:1" rel="noopener">American Tower (AMT US)</a> to sell its entire tower unit (30,722 sites across Argentina, Brazil, Chile, Germany, Peru and Spain).
<ul>
<li>The EV is €7.7 bn including the remaining payments to be done by Telxius to <a href="https://www.smartkarma.com/entities/telefonica-deutschland-holding" target="_blank" data-smartkarma-citation="entities:21687:1" rel="noopener">Telefonica Deutschland Holding (O2D GR)</a> to complete the German transaction.</li>
<li>The price is 30.x EBITDA, above the usual 23x.</li>
<li>Telefónica will reduce its debt by €4.6 bn, 12.5% of the total.</li>
<li>Debt reduction and pending corporate operations provide the group with sufficient liquidity to maintain its commitment to shareholders for the time being.</li>
</ul>
In the current context, Telefonica focuses on the management of FCF to preserve the payment of the dividend, by reducing investments. The dividend remains at €0.4 per share and debt, one of the group's main drawbacks, fell c.15% LTM. In the long term, the potential for structural growth is low, competition high, and room to maneuver limited. The current environment makes it difficult to sell non-strategic assets at adequate prices and questions the sustainability of the dividend.
<h3>Recommendation</h3>
Telefonica: DCF valuation is €4.2 (Capital IQ consensus, WACC 6.4%, g 0.3%).
<ul>
<li>The sale of Telxius may support market expectations for a potential acceleration in the execution of the strategic reshuffle announced by management, thus leading to a re-rating of the company.</li>
<li>But there are risks: slower deleverage, lower economic growth in Spain (24% of EBITDA), macro deterioration and currency depreciations in Central and South America (c. 15% of EBITDA). Positive surprises may come from further disposals at high multiples thus leading to faster deleverage, better than expected economic growth in Central and South America and a reduction of the (so far unsustainable) dividend.</li>
</ul>
Cellnex, reiterate TP of €64.36. Cellnex could become the object of a take-over.

Telxius, a subsidiary of Telefonica SA (TEF SM) (50% Telefonica, 40% KKR, 10% Pontegadea) reached an agreement with Boston-based American Tower (AMT US) to sell its entire tower unit (30,722 sites across Argentina, Brazil, Chile, Germany, Peru and Spain).

The EV is €7.7 bn including the remaining payments to be done by Telxius to Telefonica Deutschland Holding (O2D GR) to complete the German transaction.
The price is 30.x EBITDA, above the usual 23x.
Telefónica will reduce its debt by €4.6 bn, 12.5% of the total.
Debt reduction and pending corporate operations provide the group with sufficient liquidity to maintain its commitment to shareholders for the time being.

In the current context, Telefonica focuses on the management of FCF to preserve the payment of the dividend, by reducing investments. The dividend remains at €0.4 per share and debt, one of the group's main drawbacks, fell c.15% LTM. In the long term, the potential for structural growth is low, competition high, and room to maneuver limited. The current environment makes it difficult to sell non-strategic assets at adequate prices and questions the sustainability of the dividend.
Recommendation
Telefonica: DCF valuation is €4.2 (Capital IQ consensus, WACC 6.4%, g 0.3%).

The sale of Telxius may support market expectations for a potential acceleration in the execution of the strategic reshuffle announced by management, thus leading to a re-rating of the company.
But there are risks: slower deleverage, lower economic growth in Spain (24% of EBITDA), macro deterioration and currency depreciations in Central and South America (c. 15% of EBITDA). Positive surprises may come from further disposals at high multiples thus leading to faster deleverage, better than expected economic growth in Central and South America and a reduction of the (so far unsustainable) dividend.

Cellnex, reiterate TP of €64.36. Cellnex could become the object of a take-over.

Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

A trio of PE funds - KKR, Cinven, and Providence - have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil Ibercom, S.A. If the Deal goes through, all three PE firms will hold an equal stake in the company. The Offer Price is EUR22.50/share valuing the company at a market cap of ~EUR3.0bn and an enterprise value of EUR 5.011bn.Providence is currently the second-largest shareholder with (9.16%) and including them, shareholders collectively holding 29.56% have agreed to sell. However, the Deal has a minimum acceptance condition of 50% and MásMóvil's shares are currently trading above terms at EUR23.18. In this insight, we take a look at the fundamentals to see if a bump/overbid is justified.

A trio of PE funds - KKR, Cinven, and Providence - have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil Ibercom, S.A. If the Deal goes through, all three PE firms will hold an equal stake in the company. The Offer Price is EUR22.50/share valuing the company at a market cap of ~EUR3.0bn and an enterprise value of EUR 5.011bn.Providence is currently the second-largest shareholder with (9.16%) and including them, shareholders collectively holding 29.56% have agreed to sell. However, the Deal has a minimum acceptance condition of 50% and MásMóvil's shares are currently trading above terms at EUR23.18. In this insight, we take a look at the fundamentals to see if a bump/overbid is justified. 

Masmovil: Target Shareholders Looking for a Bump

Patryk Basiewicz

PGB Research

<ul>
<li>
<a href="https://www.smartkarma.com/entities/telefonica-sa" target="_blank" data-smartkarma-citation="entities:21299:1" rel="noopener">Telefonica SA (TEF SM)</a> and <a href="https://www.smartkarma.com/entities/liberty-global-plc-a" target="_blank" data-smartkarma-citation="entities:15261:1" rel="noopener">Liberty Global Plc A (LBTYA US)</a> are in talks to merge their UK operations. We do not know what will happen to the Irish bit</li>
<li>The street, as do I, assume this will be a 50:50 JV, similar to the deal Liberty did with <a href="https://www.smartkarma.com/entities/vodafone-group-plc" target="_blank" data-smartkarma-citation="entities:22204:1" rel="noopener">Vodafone (VOD LN)</a> in the Netherlands. </li>
<li>
This transaction will fundamentally, perhaps, permanently, and, perhaps, conclusively reshape the UK telco market. Clearly other market players are currently considering their options with regards to both O2 UK and Liberty as a whole, or the Virgin Media (VMed) part.
</li>
<li>
Ultimately, both Telefonica and Liberty Global want to sell those assets too. In my view, this transaction is made with a view to IPO the JV in 2-3 years. This view also informs how we should look at value creation in the deal.
</li>
</ul>



Telefonica SA (TEF SM) and Liberty Global Plc A (LBTYA US) are in talks to merge their UK operations. We do not know what will happen to the Irish bit
The street, as do I, assume this will be a 50:50 JV, similar to the deal Liberty did with Vodafone (VOD LN) in the Netherlands. 

This transaction will fundamentally, perhaps, permanently, and, perhaps, conclusively reshape the UK telco market. Clearly other market players are currently considering their options with regards to both O2 UK and Liberty as a whole, or the Virgin Media (VMed) part.


Ultimately, both Telefonica and Liberty Global want to sell those assets too. In my view, this transaction is made with a view to IPO the JV in 2-3 years. This view also informs how we should look at value creation in the deal.



O2 UK / Telefonica (TEF SM) / Liberty (LBTYA): Can You Create Value from Assets that Nobody Wants?

Credit

With the end of the cycle, precipitated by the coronavirus pandemic, central banks will step in and there is no risk of interest rates increasing anytime soon.
Redemptions and lack of liquidity have brought down bond prices, and have, therefore, created attractive entry points for some issuers. Prices may not be as extreme as two weeks ago, but still there are opportunities aplenty.
The European Central Bank will purchase sovereign and corporate debt at a pace never seen before. It will provide a strong support for investment grade issuers. However, the credit market remains fragmented. The activity on primary market has not recovered for riskier issuers.
I have compiled a list of bonds by Spanish issuers (or whose parent is Spanish) in a variety of sectors. Most are multinational companies and should be able to emerge less harmed by the looming crisis.
Please read on.
(All data have been sourced from Capital IQ)

With the end of the cycle, precipitated by the coronavirus pandemic, central banks will step in and there is no risk of interest rates increasing anytime soon.
Redemptions and lack of liquidity have brought down bond prices, and have, therefore, created attractive entry points for some issuers. Prices may not be as extreme as two weeks ago, but still there are opportunities aplenty.
The European Central Bank will purchase sovereign and corporate debt at a pace never seen before. It will provide a strong support for investment grade issuers. However, the credit market remains fragmented. The activity on primary market has not recovered for riskier issuers.
I have compiled a list of bonds by Spanish issuers (or whose parent is Spanish) in a variety of sectors. Most are multinational companies and should be able to emerge less harmed by the looming crisis.
Please read on.
(All data have been sourced from Capital IQ)

Spain

Telefonica S.A. provides telecommunications services mainly to countries in Europe and Latin America.  The Company offers fixed-line and mobile telephone, Internet, and data transmission services to residential and corporate customers.

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Telefonica SA (TEF SM)

Loyalty Shares in Spain: Double-Voting Rights Could Hinder Takeovers

In Spain, the companies that establish the double voting system will be less prone to takeover, such as Repsol SA (REP SM) and Telefonica SA (TEF...

Jesus Rodriguez Aguilar

Telefonica's Disposal of Telxius

Telefonica manages FCF to preserve the divi, by reducing investments. Debt fell c.15% LTM. Structural growth potential is low, competition high,...

Jesus Rodriguez Aguilar

Masmovil: Target Shareholders Looking for a Bump

A trio of PE funds - KKR, Cinven, and Providence - have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil...

Janaghan Jeyakumar, CFA

O2 UK / Telefonica (TEF SM) / Liberty (LBTYA): Can You Create Value from Assets that Nobody Wants?

Telefonica SA (TEF SM) and Liberty Global Plc A (LBTYA US) are in talks to merge their UK operations. We do not know what will happen to the...

Patryk Basiewicz

Spanish Issuers' Credit Opportunities

With the end of the cycle, precipitated by the coronavirus pandemic, central banks will step in and there is no risk of interest rates increasing...

Jesus Rodriguez Aguilar

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