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Fitch: Orange, MásMóvil merger neutral to ratings

March 9, 2022

Orange Spain’s intention to merge its Spanish operations with MásMóvil in Spain will be neutral for the rating but will attract high EU competition and regulatory scrutiny due to resulting market consolidation, reports Fitch.

Orange and MásMóvil have announced that they have entered into exclusive discussions to combine their businesses in Spain to create a 50:50 joint venture. The transaction values Orange Spain at an enterprise value of €8.1 billion and MásMóvil (which includes the acquisition of Euskatel) at €11.5 billion. If successfully completed, the transaction is expected to close in Q2 2023 and Orange would expect to deconsolidate the Spanish operations from its accounts. Fitch said it expects the deconsolidation would have limited impact on Orange’s leverage and operating profile.

FItch’s report says: “At the right price, the industrial rationale for a transaction that leads to market consolidation and reduces the number of main mobile operators to three from four is compelling with proven routes to extracting synergies in Europe. The merger would enhance scale economics for both Orange Spain and MásMóvil, strengthen their competitive position and lead to significant synergies. Orange expects the JV to generate synergies in excess of €450 million from the third-year post closing.”

“For Orange, the transaction also has defensive qualities, in our opinion. MásMóvil is an existing fixed-line and mobile wholesale customer. Wholesale revenue accounted for about 22 per cent of Orange Spain’s total revenue (excluding equipment sales). These revenues carry higher margins and a loss of these revenue if MásMóvil were to be acquired by another network operator in the market would lead to significant cashflow deterioration.”

“The combined entity would have a subscriber market share of around 40 per cent in mobile and 42 per cent in fixed broadband. Its combined mobile subscriber market share would not be significantly different from that of Deutsche Telekom AG (BBB+/Stable) in Germany (41 per cent) or of Orange in France (40 per cent), for example.”

“While Orange owns national fixed and mobile network assets, MásMóvil operates a ‘hybrid’ network infrastructure model that enables it to proportion its fixed cost base to be profitable with reduced service revenue scale. The viability of the hybrid model in the long run, given trends in convergence and 5G, will be an important competition and regulatory consideration in Spain and the EU. We expect authorities to weigh up whether competition and investment are most likely to benefit from the existence of three main strong market participants or four participants including one operator with a hybrid business model.”

“Fitch sees a parallel in the US in 2020 and The Netherlands in 2019. In the US, regulatory authorities eventually allowed T-Mobile US, Inc. (BBB-/Stable) to acquire Sprint and reduce the number of mobile operators to three from four. In the Netherlands, the EU allowed the third mobile operator, T-Mobile Netherlands, to acquire a fourth mobile operator, Tele2 Netherlands, which was in the early stages of deploying its network and carried investment return and payback uncertainties.”

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