By Carlos Ruiz Gomez, Practice Lead Business Development, Colt Technology Services.
This article has been published in the Spanish media Zona Movilidad
Telecommunications infrastructure forms the bedrock of the digital transformation, serving as an indispensable enabler of this transformative shift. A recent study estimates that Europe will need to invest approximately EUR 174 billion in network infrastructure by 2030 to meet the growing demand for digital connectivity . Global internet data traffic has grown massively at 34.4 percent CAGR since 2015.
The telecom industry, which manages the vast majority of critical national infrastructure, has become a prime target for cyber-attacks. This surge in malicious activities is exacerbating the need for telcos to invest heavily in the development of Very High Capacity Networks (VHCNs) (*), even as their revenues continue to dwindle. For instance, mobile data revenues of major European telco providers grew by a remarkable 20.2% from 2011 to 2012, but this growth rate has slowed down considerably, reaching only 4.0% from 2020 to 2021 . It’s no surprise that European telecom companies and industry associations have been vocal advocates for a level playing field, urging for increased regulatory pressure on content and application providers, shared investment responsibilities among digital giants in network infrastructure development, and a relaxation of Single Market rules to facilitate consolidation within the European telecoms landscape.
The European Commission’s response to these requests has been nuanced. On the one hand, Brussels has substantially tightened regulatory requirements for online platforms, as enshrined in the Digital Services Act, Digital Markets Act, and Artificial Intelligence Act. Regarding the need for further investments, the Commission – concerned about the possibility of falling short of its Digital Compass goals for 2030 – has acknowledged the need for more “efficient investments” that draw private capital .
However, Thierry Breton, the European Commissioner for Internal Market, is willing to continue the debate in 2024, even as certain governments have publicly declared their opposition to a “fair share“: “This discussion is over,” Germany’s Stefan Schnorr, state secretary for digital and transport, stated unequivocally. It is in the realm of European telecommunications market structure that we might witness more immediate progress in the concessions that Brussels is prepared to make. Indeed, Breton has consented to address the intra-market consolidation debate to “facilitate” the rise of authentic pan-European infrastructure operators where market consolidation would be an option “for operations within a member state while safeguarding consumer advantages and innovation” . The mounting pressure from recent financial transactions underscores the need to contextualize the latest developments in Spain’s telecommunications market.”
Evolving landscape: A new era for Spain’s cellular market
The telecommunications landscape in Europe is undergoing a dynamic transformation as MNOs (mobile network operators) strategically reposition themselves to optimise their operations and enhance profitability. This trend is exemplified by the recent sale of Vodafone’s Spanish unit to British investment firm Zegona.
Zegona, the new owner of Vodafone Spain, plans to maintain the Vodafone brand for up to 10 years after the transaction’s completion. It has also established various partnerships with Vodafone for procurement and roaming services to ensure seamless operations in the country. This arrangement ensures that Spanish consumers continue to enjoy access to Vodafone’s network and services.
The proposed merger of Orange and MásMóvil, announced in July 2022, could pose a greater challenge than Vodafone’s exit from Spain. This joint venture, where Orange and MásMóvil would share 50% ownership, could potentially violate the unwritten EU guideline that prohibits in-market mergers that could harm competition by reducing the number of telecom service providers from four to three. As a result, the European Commission has initiated an “in-depth” and “wide-ranging” investigation into the proposed transaction to assess its impact on the Spanish telecommunications market.
The Spanish wireless market is currently led by Telefónica with a 28.24% share of the mobile market in March, followed by Orange Spain with 22.91%, Vodafone Spain with 22.26%, and MásMóvil with 20.55%. In this market, Digi Communications’ Spanish subsidiary is an MVNO (Mobile Virtual Network Operator) with Telefónica as its Host MNO (Mobile Network Operator). Digi is seeking to establish its own network in Spain, and it has taken a strategic step to potentially clear the Orange and MásMóvil deal with the European Commission.
The Bucharest-based firm has agreed to acquire a number of spectrum licenses (blocks in the 1800MHz, 2100MHz, and 3500MHz bands) from MásMóvil for a combined EUR 120 million should the latter’s merger with Orange’s local unit get through regulators. This acquisition would significantly enhance Digi’s spectrum holdings and enable it to build a stronger standalone network in Spain.
Digi might also have the key to maintaining mobile competition levels in Portugal through an offer to gain spectrum usage rights to 2x10MHz in the 1800MHz band and 2x10MHz in the 3400MHz-3800MHz band from Vodafone. This move could further strengthen Digi’s position in both Spain and Portugal, making it a more formidable competitor in these markets.
As a result of these strategic moves, Orange Group CEO Christel Heydemann expressed confidence that the transaction with MásMóvil would be completed in the first quarter of 2024. This would mark a significant consolidation in the Spanish telecommunications market and reshape the competitive landscape.
A wave of private equity investments in Spain’s fibre landscape
The Spanish fibre market has witnessed a surge of private equity activity, with three major deals shaping the landscape. These transactions reflect a growing recognition of the strategic importance of fibre infrastructure and its potential to fuel the connectivity and the digital transformation of the country.
As of February 2023, Movistar held a 35.68% share of Spain’s fixed broadband market, followed by Orange Spain with 23.97%, Vodafone Spain with 18.76%, and MásMóvil with 18.29%. The market is characterized by fiber deployments, with several nationwide developments and a series of Private Equity-backed investments focused on regional and rural providers.
In July 2022, Telefónica de España sold a 45% stake in BlueVia Fibra to Vauban Infrastructure Partners and Crédit Agricole Assurances (CAA). This deal valued BlueVia at an impressive multiple of 27.1x its proforma estimated OIBDA for 2022. With the newfound capital, BlueVia aims to expand its network to reach 5 million homes in rural areas by the end of 2024, positioning itself as a neutral wholesale operator. This strategic move aligns with Telefónica’s plan to phase out its copper network and replace it with fibre by 2024, leveraging the proceeds from the sale to finance this ambitious project.
The second notable transaction involves Digi Communications, a pan-European telecommunications operator with a presence in Belgium, Italy, Portugal, and Romania. Digi has invested heavily in fibre infrastructure in Spain, committing EUR 300 million in the southern region with the backing of Scottish investment firm abrdn. However, there are now indications that Digi may sell its Spanish fibre assets to fund the development of its mobile operations in the country, including establishing its own mobile network. This move would be consistent with Digi’s aggressive growth strategy in Spain.
The third significant development involves Red Eléctrica, the operator of Spain’s national electricity grid. In December 2021, investment firm KKR acquired a 49% stake in Reintel, a major dark fibre provider in Spain and a subsidiary of Red Eléctrica. This deal enabled the parent company to focus resources on expanding its 5G network, leveraging Reintel’s vast network of dark fibre cables, which spans 80,000 towers in rural areas.
These three deals underscore the growing importance of fibre infrastructure in Spain’s digital landscape. Private equity firms are recognizing the strategic value of fibre and are actively investing in its development. This trend is likely to continue as Spain strives to enhance its connectivity and embrace the opportunities of the digital age.
Private equity firms have also demonstrated a keen interest in other, more regional fiber providers in Spain:
- In October 2021, Swedish private equity firm EQT sold Spanish telecom firm Adamo to French investment firm Ardian for EUR 1 billion. Adamo operates in more than 14 autonomous communities in Spain, providing fiber-optic broadband access and wholesale services. With the acquisition, Ardian gained its first foothold in Spain’s telecommunications sector. However, the firm is no stranger to the industry, holding a controlling stake in INWIT, Italy’s leading tower operator, and a significant interest in EWE, one of Germany’s largest utilities and a leading telecommunications provider. Adamo, with its network reaching 1.8 million homes, plans to expand its reach to 3.2 million households and extend its backbone network to over 11,000 kilometers using the capital raised from Ardian. The acquisition of Adamo marks the second largest private equity deal in 2021, following Apax Partners and Warburg Pincus’ acquisition of T-Mobile Netherlands for EUR 5.1 billion.
- In May 2022, Antin Infraestructure Partners sold Lyntia Networks – a lit and dark fibre provider – to Axa IM Alts and Swiss Life Asset Managers. Lyntia Networks owns over 43,000 km of fibre built primarily alongside the national electric power and gas distribution infrastructure, and offers long-haul access services in circa 2,700 metropolitan and underserved small-to-medium sized towns, as well as in coastal areas. After the operation, Antin continued to own and operate Lyntia Access, the segregated fibre access business from Lyntia Networks. But then, in August 2022, Avatel Telecom – another fibre access provider which started in Marbella and then moved to other regions – decided to buy Lyntia Access from Antin, and created Avatel Access. However, in February 2023, the deal was unexpectedly halted due to disagreements between the parties over financing terms.
- To cap it off, in June 2022, Asterion Industrial Partners and Teras Capital acquired Olivenet, a regional telecom provider that operates in Andalusia, covering approximately 35 municipalities and serving over 900,000 homes. With the new capital, Olivenet aspires to expand its reach to over 1.5 million homes and build nearly 6,000 kilometers of fiber optic network. Asterion specialises in infrastructure investments across Spain, Italy, the UK, and France, while Teras Capital is an investment firm with interests in technology and real estate businesses.
The growing interest in Spain’s fiber market is driven by the higher valuation multiples enjoyed by infrastructure-focused companies (infracos or netcos) compared to traditional vertically-integrated retail-focused telco service providers. While traditional telecom operators typically command valuation multiples of six to seven times their annual operating margin, fibercos and towercos can fetch multiples of 15 to 20 times their margin.
They also exhibit superior EBITDA margins, are less complex to manage than servcos (the retail service-oriented arm of a telco), enjoy higher equipment utilisation rates, are more efficient, have easier access to capital, face fewer geographical expansion constraints, can diversify their portfolios more readily (e.g., into Distributed Antenna Systems, Internet of Things, or RAN Intelligent Controller systems), need not invest in wireless spectrum, and their ownership of hard-to-replicate infrastructure makes them less vulnerable to competition, disruption, and acquisition. These factors collectively explain the increasing trend among telcos to spin off their infrastructure assets into netcos, as evidenced by Telefónica’s creation of Telxius and subsequent sale of its tower business to American Towers Inc., Orange’s divestment of its tower business to Totem, and Cellnex’s decision to sell its private networks business to Boldyn Networks. In fact, studies have shown that when a telco separates its business into a netco and a servco, the market capitalization of the combined entity can increase by up to 40% compared to the original integrated company.
Easing market entry: Unlocking opportunities for innovation and growth
The withdrawal of Vodafone from Spain and the potential merger between Orange and MásMóvil, with the assistance of Digi Communications, mirror the ongoing market consolidation across Europe. These developments could shape the future of Europe’s wireless telecommunications market in the years to come. Meanwhile, the Private Equity-driven fiber market frenzy in Spain foreshadows similar trends in less mature markets like the UK.
However, the most noteworthy move in Spain’s telecommunications market is the government’s decision to acquire a controlling 10% stake in Telefónica through state-owned SEPI. This marks the first government intervention in the Spanish telco incumbent since its privatisation 26 years ago. The move is reportedly aimed at thwarting Saudi Telecom Company (STC Group), owned by the Saudi government through the Public Investment Fund (PIF), from gaining control of Telefónica. In September 2023, STC Group announced its intention to purchase a controlling 9.9% stake in Telefónica’s shares.
The government’s decision to acquire a controlling stake in Telefónica is a significant move that goes against the grain of the current trend towards the creation of pan-European telecommunications players. Moreover, there is little reason to justify this partial nationalisation, as the Spanish government already had the power to veto STC’s acquisition of Telefónica.
In an attempt to justify the move, Nadia Calviño, Spain’s Minister of Economy, drew parallels with Germany and France, where their respective governments own controlling stakes in Deutsche Telekom and Orange. However, these examples are not entirely relevant, as they represent the very problem that Europe faces: the excessive government involvement in national telecoms champions.
The Saudi telecoms carrier, STC, is welcoming the return of the Spanish government to Telefónica’s board. While Madrid’s 10% controlling stake could protect Telefónica from future consolidation in the European telecoms market, it also effectively allows STC to proceed with its plan to acquire a 9.9% stake in the company.
The partial nationalisation of Telefónica is an anomaly in the context of recent market trends, and it suggests that European governments may be consolidating their political power in the telecoms sector. If Thierry Breton, the European Commissioner for Internal Market, is serious about market deregulation, he will need to encourage European governments to relinquish their control, not expand it.
(*) VHCN is a term that was introduced by the European Electronic Communications Code  and that usually refers to 5G and Optical broadband networks.
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