Vodafone to Buy Ono in $10 Billion Spanish Cable Push
Vodafone Group Plc (VOD), the world’s second-largest wireless carrier, agreed to buy Spanish cable operator Grupo Corporativo Ono SA in a 7.2 billion-euro ($10 billion) transaction to boost TV and broadband offerings.
The purchase gives Vodafone 1.9 million customers in Spain, complementing its mobile service and helping it challenge Telefonica SA (TEF) and Orange SA. (ORA) The deal will generate savings of about 2 billion euros and potential revenue addition of 1 billion euros, Newbury, England-based Vodafone said today.
Vodafone, which bought Germany’s Kabel Deutschland Holding AG last year, is adding Internet and TV services across Europe as it looks for ways to compensate for falling mobile revenue. The deal may spur more takeovers as rivals try to match Vodafone’s size, said Robin Bienenstock of Sanford C. Bernstein.
“It’s the start of a whole new set of M&A stories, pan-European,” the London-based analyst said in an interview. “You start to see cross-border stuff.”
Vodafone will finance the deal, which preempts a planned initial public offering approved by Ono’s investors last week, with cash and undrawn bank facilities. The 7.2 billion-euro valuation includes 3.3 billion euros of debt. Ono shareholders include private-equity firms Providence Equity Partners, CCMP Capital Advisors LLC, Quadrangle Capital Partners and Thomas H. Lee Partners. The four together hold about 54.4 percent of Ono.
Europe’s communications market is consolidating as Vodafone and rivals such as billionaire John Malone’s Liberty Global Plc (LBTYA) vie for assets. Liberty agreed to take full control of Dutch broadband provider Ziggo NV for $6.7 billion in January, and last week, French cable carrier Numericable SA won a bid to combine with Vivendi SA’s SFR wireless unit.
At the same time, AT&T Inc. (T) remains interested in buying Vodafone even after giving up the option to bid for the carrier for six months, people familiar with the situation said in January. Dallas-based AT&T has expressed interest specifically in Europe’s move into faster, fourth-generation wireless networks, which are a few years behind the services in the U.S. and present the opportunity for carriers to charge a premium.
“Vodafone has its own standalone strategy,” Chief Executive Officer Vittorio Colao said today on a conference call. “If Vodafone becomes a takeover target, we will listen to the stories of whoever has a different view.”
To win Ono, Colao had to convince the company’s private-equity investors that he could offer them a better deal than the IPO, without overpaying. The share sale was expected to fetch 7 billion euros to 8 billion euros, people familiar with the matter have said.
“What are the catalysts for a deal? It depends on the music; it takes two to dance,” Colao said. “In this case, the music was the fact that the IPO was coming. You always need something to trigger a conversation.”
Vodafone had raised its offer to about 7 billion euros from about 6 billion euros on March 5, people familiar with the negotiations said.
The deal must be signed off by regulators, although the companies don’t anticipate antitrust concerns to be an obstacle, Colao said.
Colao is making purchases while he has the benefit of the $130 billion sale of Vodafone’s stake in Verizon Wireless, much of which was returned to shareholders, and the potential of a takeover by AT&T to keep investors satisfied, Bienenstock said.
U.K. regulators compelled AT&T to clarify its intentions regarding a Vodafone bid after reports that it was considering an offer for the company. In a statement in January, Vodafone said it had no plans to make an offer for Vodafone in the next six months.
Colao has said that he has $30 billion to $40 billion in “spending power,” and Vodafone has committed to 19 billion pounds ($32 billion) in network spending in the next two years. Vodafone bought Kabel Deutschland for more than $10 billion and is working on integrating the German cable operator. Globally, Vodafone trails only China Mobile Ltd. in the number of wireless subscribers.
The Spanish deal values Ono at 10.5 times last year’s earnings before interest, taxes, depreciation and amortization. When adjusted for savings, the multiple is 7.5, Vodafone said.
“The price is at the absolute top end of what you can justify,” Bienenstock said.
Ono’s sales were 1.6 billion euros in 2013. The company added 9,000 Internet customers and 183,000 mobile subscriptions in the fourth quarter while it lost 17,000 TV customers. Vodafone said the TV loss was due to a poor economy and that it expects subscriptions to recover.
The Spanish market is showing “positive signs” as the economy emerges from a recession, Colao said. The investment in Ono will save Vodafone on expansion costs as it builds out a high-speed fiber broadband network with Orange, the company said. Vodafone’s Spanish unit reported a 14 percent decline in service revenue last quarter.
The purchase of Ono could lead to further deals in Spain. Orange of France has intensified its search for acquisition targets in Spain to avoid being left out of consolidation, people familiar with the matter said last month. France’s biggest carrier is discussing its options with investment banks, with possible targets including Jazztel Plc and TeliaSonera AB’s Yoigo unit, they said at the time.
Morgan Stanley advised Vodafone, and Robertson Robey Associates LLP assisted its board. Deutsche Bank AG was the lead adviser to Ono’s shareholders, while Bank of America Merrill Lynch, UBS AG and JPMorgan Chase & Co. worked as co-advisers.