Spain's Surge

Its companies are already a power in Latin America. Now, Spanish execs are prowling the globe for deals

It's the kind of acquisition spree even a U.S. corporate chieftain would find impressive. In the space of 24 months, Juan Villalonga, the young chief executive of Spain's Telefonica, has snapped up controlling stakes in a dozen Latin American phone companies, Internet service providers, and portals. In March, he acquired one of Europe's biggest media companies, Dutch group Endomol Entertainment Holding. Now he's close to winning the biggest prize of all--a $134 billion merger with Royal KPN, the Dutch national phone company. If the deal comes off, it would be the first cross-border merger between two of Europe's former phone monopolies--and it could trigger the consolidation of the entire telecom industry in Europe.

Villalonga's success is no fluke. He is part of a new breed of Spanish e-bosses who want to leave their mark not only on Spain but also across the globe. It is a stunning turnabout for those who assumed London, Paris, and Frankfurt would dominate the European Union: Madrid is becoming a capital of corporate aggressiveness and clout. "The idea of globalization is permeating the entire corporate landscape. Either you are global or you are finished," says Javier Loizaga Jimenez, a partner at Madrid's Mercapital Financial Services.

U.S.-BOUND. Spain Inc.'s resurgence was spurred by a breakneck overhaul of the country's economy in the late 1990s. Prime Minister Jose Maria Aznar set the stage by trimming the role of the state, embracing free markets, and privatizing state companies over the past four years. His all-out effort to slash Spain's soaring budget deficit and join the single European currency has paid rich dividends in access to capital markets. With Spain in the euro zone, the country's corporate chiefs can tap the bourses of an entire continent to finance their big foreign acquisitions. That was impossible before the euro's launch, when Spanish companies were bound to the volatile peseta and domestic exchanges.

Aznar's liberalization unleashed Spanish executives' pent-up competitive spirit, while the euro made it possible to compete. The most dramatic example: Oil giant Repsol's $15.4 billion acquisition of Argentina's YPF, making it the world's seventh-largest oil company. YPF's bylaws mandated that any acquirer pay cash. Chief Executive Alfonso Cortina thought he would have to persuade YPF management to change the bylaws to finance the deal. But investment banks assured Cortina that they could quickly raise the money in the European equity and debt markets. As a result, more than 60% of Repsol's revenues now come from outside Spain. "It's practically impossible to think of a Spanish company launching such a big issue and placing it with success without the euro," says Cortina.

Spanish managers like Cortina are well-groomed for this global challenge. Many boast business-school degrees from America's top universities, speak several foreign languages, and have spent a good portion of their careers abroad. As boundaries fade across the euro zone, these executives want to leave their impact on European banking, telecommunications, media, transportation, technology, and leisure. "In the past, it was our dream to join the Club of Europe. Now, little by little, Europe is no longer our benchmark. We believe we can lead, and do better than others," says Javier Vega de Seoane, a partner at Madrid-based private-equity house Gestlink.

The Spanish have already flexed their muscles in Latin America. Over the past five years they have pumped more than $56 billion into the region. Telefonica is now No. 1 in Latin American telecom, having spent $10.9 billion on acquisitions there. Spain's two largest banks together have invested more than $15 billion to be No. 1 and No. 2 in the region: Banco Santander Central Hispano is angling to snare Mexico's No. 3 bank Serfin this month. Spanish electricity giant Endesa is Latin America's biggest electric utility with a lock on 9 million customers. Spain's Mapfre is the Continent's largest insurer.

Buoyed by the revenues and profits gained in Latin America, Spain's companies are nabbing assets in Europe and forging powerful new alliances in the U.S. BBVA, eager to build a global e-banking business, acquired a majority stake in Dublin-based First-E bank in March for $675 million. In a race to become the America Online Inc. for the global Hispanic population, Telefonica's Internet subsidiary, Terra Networks, is moving into Miami and New York with a Spanish- and English-language Internet portal. And Madrid-based media company Prisa teamed up on Mar. 10 with Hollywood's Universal Music Group to create a Latin music record label, Muxxic Latina, based in New York and run by Prisa subsidiary Gran Via Musical. Even Spanish perfume maker Puig has nabbed French label Nina Ricci.

Perhaps the biggest surprise is Spain's burgeoning New Economy. Software startups, venture capital, 16-year-old Internet gurus, and twentysomething millionaires--Spain has them all. Pep Valles, who once hawked high-speed data connections to businesses in Barcelona prior to the 1992 Olympics, launched a portal called Ole in 1997 that rapidly became the country's No. 1 with 80 million views per month. Valles reaped more than $30 million when he sold Ole in 1999 to Telefonica, which renamed the group Terra Networks.

Now the government wants to encourage more risk takers like Pep Valles. Aznar is planning to boost state spending on research and development to 2% of GDP by 2003, up from 0.8% today. Spain was the first on the Continent after Finland to auction third-generation cellular licenses, giving Spain's industry a headstart in marrying mobile phones to the Internet. "We are lucky. We have very good politicians who understand the New Economy," says BBVA Chairman Francisco Gonzalez.

Spanish companies are setting the pace in Europe when it comes to unlocking shareholder value. Telefonica was the first ex-monopoly to spin off yellow pages and Internet units, tapping into the huge demand for Internet stocks. Terra Networks' $600 million flotation last November immediately transformed it into Europe's largest Net company, with a market cap of $10.3 billion--three times its pre-market valuation--and gave a hefty kick to Telefonica's share price. Terra's market cap has since nearly doubled, to $19 billion. In April, Deutsche Telekom followed Telefonica's lead by floating T-Online, raising $3.1 billion. Now, France Telecom is planning a similar move.

Indeed, Spain's equity culture has quietly surpassed that of several neighboring countries. At $280 billion, Spain's mutual-fund industry has more than tripled in five years. Nearly 8 million of a population of 40 million Spaniards are stockholders, compared with only 5.7 million in Germany, a country twice Spain's size. Spain's Bolsa recently launched the Latibex, a market in euros for the main Latin American countries. It now trades seven stocks, including Telefonos de Mexico, and is aiming for 30. "We see ourselves as the natural bridge between Europe and America," says Antonio J. Zoido, president of the Madrid Stock exchange.

FASHION FORWARD. While the big payoff for the Latin American investment may still be several years away, many companies have gained strategic girth as a result of their investments. Villalonga hiked revenues by 92%, to $22 billion, over the past four years, as net profits doubled. Over the same period, Telefonica's market capitalization has expanded 705%.

Villalonga, who spent 9 years at McKinsey & Co. in the U.S. and Europe and sharpened his dealmaking skills as an investment banker at Credit Suisse First Boston in Spain, is determined to remain a step ahead. That may prove increasingly difficult. The more Villalonga works to build Telefonica into an international player, the more attractive it becomes as a takeover target for rivals such as Deutsche Telekom and British Telecom. By making a move to join forces with KPN, some bankers say, Villalonga may well end up unleashing a bidding war which he could lose.

Whatever happens, Villalonga has done more to build New Economy businesses than any of his European rivals. Terra Networks has acquired Internet service providers in Chile, Peru, Guatemala, Brazil, and Mexico. Since Terra acquired Infosel for $280 million in October, the number of its subscribers in Mexico has leaped from 40,000 to 220,000. Last year, Mexico accounted for 37% of Terra's revenues, vs. 15% from Spain. In 1999, Terra had $87 million in revenues and 1.3 million subscribers. And in Europe, Villalonga plans to bid for third-generation mobile licenses.

Spain Inc.'s 21st century armada also includes retail fashion design. Analysts and advertising agencies have dubbed Zara, a $1.9 billion family-owned company based in La Coruna, one of Europe's hottest retailers. Zara's retailing savvy has won a devoted customer base in Paris, London, and New York by rapidly capturing new concepts from the streets of Paris and London and the catwalks of Milan and then pumping new designs into their 415 stores twice a week. Seven days later, flops are replaced by hotter-selling items. "They've understood that the consumer wants disposable fashion. We used to think of Spanish products as third-rate. Now they are on a par with Italy," says Marina Salzman, Worldwide Director of Young & Rubicam's Brand Futures Group in Madrid.

Even midsize companies are showing surprising clout, from Basque-based conglomerate Modragon to motorcycle maker Derby and transport-services company Alsa. All three have built up successful operations in China. With 16 joint ventures and $290 million in revenues in 1999, Alsa is the No. 1 foreign bus company in China and the first foreign company to be granted a license to operate there. "We have lost the fear of going abroad," says Jorge Cosmen, general director of corporate services at Alsa and the sixth generation of family managers to run the company.

Spain's banks are among the most aggressive global players in the Internet. In April, BBVA began rolling out Internet banking and financial services in Spain, Britain, and Germany through Dublin-based UnoFirst Group, the result of the March merger of First-E bank with BBVA's Uno-E online financial-services unit. First-E will start up in Latin America this year. Together, BBVA and partner Terra Networks will hold 67.5% of UnoFirst, which isn't expected to turn a profit for the next three to four years. "We will invest as much as the market needs in technology. There is no limit," says Gonzalez. Although Internet penetration in Spain remains low, at 10% of the population, Gonzalez believes that gap will disappear within four years.

"I FOUND A TIGER." Gonzalez' biggest competition in global virtual banking may be Banco Santander, his crosstown rival. Santander CEO Angel Corcostegui clinched an alliance with Latin American online brokerage Patagon on Mar. 8 in part by convincing Patagon's 26-year-old founder, Wenceslao Casares, that he was Internet-hip. Casares was stunned that the big bank's vision for developing financial services on the Web jibed with his own: "I went in to see a dinosaur, and I found a tiger."

The Spanish expansion still carries risks. Latin America's markets are relatively immature, and the region's economies have sunk into recession twice since 1995. Nonetheless, Spain Inc.'s bosses are increasingly confident that the region is on the path to greater stability. Even in the recession-wracked market of 1999, Santander generated net profits of $580 million. "The economies are getting better, systems are improving, and the consumers are richer," says Corcostegui.

Meanwhile, Aznar still has work to do. Many managers criticize his government for not liberalizing markets rapidly enough. That leaves ex-monopolies with lingering market advantages. Miguel Angel Fernandez Ordonez, former chairman of the antimonopolies commission, insists that the tempered pace of liberalization has boosted Telefonica's fortunes and its market cap at the expense of competition and consumers. A key test now of Aznar's commitment to competition will be whether his government steps in to exercise its golden share in Telefonica to block any hostile bid if one emerges.

Perhaps the most promising development for Spain Inc. is the talented young generation that is reaching top positions faster than in any other major European economy. "Right now, Spain is overtaking Italy on many fronts, and the reason is political stability and the vitality of a new generation of talented managers," says Richard N. Gardner, former U.S. Ambassador to Spain and Italy and a professor at Columbia Law School.

The impact of these young executives is evident at Merrill, Lynch & Co.'s Picasso tower office in Madrid, where two young bankers, former expatriates, have returned to co-manage the investment bank's operations in Spain and Portugal. Eva Castillo left Spain in 1992 to take a job as executive director of equity sales for Goldman, Sachs & Co. in London, thinking Spain would take "a long time" to adapt to globalization. Castillo, 37, returned to Madrid in 1997 and calls the transformation "dramatic." Her cohort, Francisco Sanchez-Asiain, 39, left in 1984 to join Citicorp Investment Bank in New York. "Now, Spain is exactly the same as New York--in the way we do business, in access to information, in the mentality," says Asiain, who runs Merrill's investment-banking business in Spain. Europe has not heard the last of these hard-driving Spaniards.

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