By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Announcement date: 01/06/2020
- Industry: Telecommunication services
- Implied EV/NTM EBITDA: 13.11x
- Financing: €2bn loan
- Acquirer advisors: Barclays Capital, Morgan Stanley
- Target advisors: Goldman Sachs, BofA Securities, BNP Paribas Securities, J.P. Morgan Securities
In June a trio of private equity funds announced its acquisition of 90.84% stake in Spanish telecoms operator MasMovil valuing it at €3bn equity value and €5bn enterprise value. The €22.5 offer per share represents a 25% premium to share price 5 days before the announcement and more than 5x the value of the group’s stock from 4 years ago.
The LBO is expected to use leverage of about 4.5x EBITDA, smaller than in many private equity deals struck before the pandemic, reflecting banks’ reluctance to take more risk. The consortium secured a 7-year term €2bn loan to finance the acquisition, the rest will be covered by private capital.
The market was receptive to the news of takeover, with shares jumping 23% immediately after the announcement.
The deal closed in September and immediately after the transaction was finalised, Vodafone reportedly approached the consortium with an offer to acquire MasMovil for €6 billion, including debt. MasMovil denied any takeover talks with Vodafone.
The deal is the largest take-private of a listed European telecoms company in more than 2 years, since Macquarie’s $6bn takeover of TDC.
CONSORTIUM DETAILS: KKR, Cinven & Providence Equity Partners
The private equity consortium involved in this deal consist of some of the biggest names in the private equity industry.
KKR is a leading global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit, with strategic partners that manage hedge funds. As of June 30, it had $222bn AUM, 103 portfolio companies and generated 25.6% cumulative gross IRR since 1976.
Cinven is a private equity firm specializing in investments in buyouts, secondary, carve-out, growth capital, new market expansion, business roll-outs, and industry consolidation. In 2018, it had €11bn AUM, over 130 portfolio companies and €40bn in realised proceeds.
Providence Equity Partners is a principal investment firm typically investing in the media, communications, education, software and services. It has around $50bn AUM and over 200 portfolio companies.
TARGET DETAILS: MasMovil Ibercom
- Founded in: 2006
- Headquartered in: Madrid, Spain
- Implied equity value: €3bn
- Implied EV: €5bn
- LTM EBITDA: €381.2mn
- EV/ LTM EBITDA: 13.11x
MásMóvil Ibercom S.A. provides telecommunications services to residential customers, businesses, and operators in Spain. It is the fourth largest telecommunications operator in Spain. It offers fixed line, mobile, and internet services to residential customers, businesses and operators, through its main brands: Yoigo, MASMOVIL, Pepephone, Llamaya, Lebara, Lycamobile and Hits mmobile. The Group has its own mobile network infrastructures for 3G and 4G. MASMOVIL Group’s fixed network close to 24,4 million with optical fibre. Its 4G mobile network covers 98.5% of the Spanish population. The Group also has agreements with other telecommunications operators in Spain, therefore completing its coverage of fixed and mobile networks, making it one of the operators with the most comprehensive network coverage in Spain. The Group has more than 10.5mn customers.
RATIONALE:
STRONG LBO CANDIDATE
MasMovil represents an almost “perfect” (see risks and uncertainties) PE target. Over the past 4 years its EBITDA continuously increased and remained positive. In 2019 it reached 16x the level of EBITDA from 2016. This growth in profitability has been mainly driven by numerous acquisitions MasMovil undertook. Moreover, MasMovil has a very strong market position with 14% share of the Spanish mobile market and a 11% share of the broadband one. Hence, it seems like a fairly stable and secure investment, showcasing characteristics of a great LBO candidate.
INVESTORS’ EXPERTISE
Each investor in the consortium brings some expertise to the table when it comes to the European telecoms expertise. Providence has previously backed cable company Ono which was sold to Vodafone and prior to the takeover it already owned a 9.2% stake in MasMovil having first invested in in 2016.
KKR has also been active in European telecoms having acquired UK Hyperoptic in 2019. It also and German fibre company Deutsche Glasfaser this year. In Spain, in 2017, it acquired a 40% stake in Telefonica’s infrastructure arm Telxius.
Cinven owns Ufinet since 2018, a provider of fibre infrastructure and transmission services to telecom operators.
Hence, the pool of expertise brought by these three investors will probably enable MasMovil to grow and strengthen its market position.
“Running MasMovil outside the public glare could permit management to drive growth harder and maximise negotiating power into any future consolidation endgame” ~Jerry Dellis, Jefferies
RISKS AND UNCERTAINTIES
Earlier we alluded to MasMovil looking like a strong LBO candidate, however that depends on which metric we look at when assessing its “strength”. PE funds often expect stable and positive cash flow generation from the businesses they acquire in order to ensure regular interest and principal repayments on the loan. However, MasMovil hasn’t delivered stable nor positive cash flows consistently over the past few years. The firm only recorded positive UFCF in 2016 and 2019, whilst in 2017 and 2018 it was negative. Hence, unless the consortium has a robust plan to stabilise the cash flows it seems as a risky bet.
Although, the negative cash flows in 2017 and 2018 have been caused by high CAPEX, signalling the firm has been investing in its future growth so the outlook may actually be very promising if these investments pay off in the subsequent years.
