Jazztel Bucking Slump Seen Luring Vodafone Bid: Real M&A

Jazztel Plc offers potential acquirers the chance to gain share in the Spanish phone market as one of Europe’s few remaining fast-growing carriers.

Revenue at Jazztel, a provider of broadband and mobile-phone services, is projected to outpace all of its larger competitors in Spain and 91 percent of European peers through 2015, according to data compiled by Bloomberg. Those growth prospects could attract Vodafone Group Plc as it tries to halt Spanish market-share losses, while Orange Spain -- France Telecom SA’s Spanish unit -- could seek to buy Jazztel to add more subscribers and shore up its position in the country, according to Swisscanto Asset Management AG.

Jazztel almost doubled its share of the Spanish broadband market from 2009 to 2012 as it focused mostly on the fixed-telephone business through a reliable and affordable product that has gained popularity among debt-strapped Spaniards. The company predicts profit could more than triple in the next five years as it continues to lure customers from rivals and add more wireless subscribers.

Jazztel “is a fast-growing asset,” Andres Bolumburu, a Madrid-based analyst at Banco de Sabadell SA, said in a telephone interview. That makes it “a clear and attractive takeover target.”

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While the stock has more than doubled in the past five years, pushing Jazztel’s valuation relative to earnings above the average among European telecommunications companies, Bolumburu estimates the 1.5 billion euro ($1.9 billion) carrier still could fetch a premium of more than 20 percent in a takeover as soon as this year.

Beatriz Valverde, a spokeswoman for Jazztel, declined to comment. Jazztel has its legal headquarters in London and its main operating offices in Madrid.

Jazztel has expanded in Spain over the years by offering low-cost broadband Internet and phone service and eventually wireless plans to steal customers from Telefonica SA, the Spanish market leader. The company has posted eight straight years of revenue gains, and boosted earnings every year since 2010, when it posted its first annual profit.

During the past three years, even as Spain’s economic slump pushed unemployment in the country to 26 percent, Jazztel’s share of the broadband market nearly doubled to more than 11 percent, data compiled by telecom regulator CMT show. It had 343,000 wireless subscribers as of the end of 2012, more than double the number a year earlier, the company said.

Bright Spot

Jazztel, which released its five-year business plan last month, estimated that its share of the broadband market will grow to as much as 16 percent by 2017, while mobile-phone subscribers will top 2.3 million and profit will more than triple to at least 180 million euros.

Analysts project Jazztel’s sales will increase more than 30 percent through 2015, more than four times the average among European telecommunications companies with a market value larger than $1 billion, according to data compiled by Bloomberg.

Jazztel is “one of the few bright spots within a pretty stagnant industry,” said Boris Boehm, who helps manage about

1.4 billion euros at Aramea Asset Management AG in Hamburg. While he sold Jazztel shares about a year ago, Boehm said he considers the stock an attractive investment again based on the prospects for consolidation among phone carriers.

Shrinking Margins

“As big telecommunications companies suffer from lower revenues and shrinking profit margins, they will have to look for growth somewhere else,” Boehm said. Jazztel’s broadband expertise could help its larger rivals as they seek to offer bundled voice, Internet and mobile-phone services.

Carriers are investing in fiber-optic networks across Europe to tap rising demand for high-speed Internet services amid declining sales from traditional voice and text-messaging services. In October, Telefonica and Jazztel signed an accord to jointly deploy fiber-to-the-home networks for 3 million real estate units.

At Telefonica, earnings have declined the past two years, and the trend is the same at Vodafone, Spain’s No. 2 phone carrier, and France Telecom, owner of the No. 3 provider Orange Spain. At the same time, Telefonica’s share of the Spanish broadband market has shrunk during the period, as has Vodafone’s, according to data compiled by CMT.

‘Big Fish’

Jazztel’s chairman and largest shareholder, Leopoldo Fernandez Pujals, predicted on March 14 that the Spanish telecommunications market is headed for consolidation. The shares rose as much as 2.2 percent that day, following his comments.

“There are some piranhas like us out there,” Fernandez Pujals, a Cuban-American entrepreneur known in Spain for founding the pizza-delivery chain Telepizza, told reporters in Madrid. “Big fish will buy those smaller players that are biting them all the time.”

Today, Jazztel slipped 0.2 percent to close at 5.93 euros in Madrid trading.

Orange Spain is interested in making acquisitions in the euro area’s fourth-largest economy as it aims to overtake Vodafone, Chief Executive Officer Jean Marc Vignolles said in a Feb. 26 interview.

Fernando Castro, a spokesman for Orange Spain, declined to comment when asked about the status of any deal or whether the company has approached Jazztel.

Not Cheap

TeliaSonera AB said today it halted a sale of its Spanish wireless unit, called Yoigo and valued by analysts at about 1 billion euros, after failing to attract offers it considered high enough. Vodafone and France Telecom were among companies that were interested in the business, people with knowledge of the matter have said.

Peter Braendle, who manages 500 million Swiss francs ($528 million) at Swisscanto Asset Management in Zurich, including Jazztel shares, said the company could appeal to both Orange Spain and Vodafone as they seek to bolster their market share.

“The problem will be the price,” Braendle said in a phone interview. “Jazztel isn’t cheap.”

Jazztel’s shares have more than doubled in the past five years, compared with a 42 percent loss in Spain’s benchmark Ibex 35 index and a 20 percent drop in the 25-company Bloomberg Europe Telecommunication Services Index. After the gains, Jazztel’s enterprise value is now 9.5 times its earnings before interest, taxes, depreciation and amortization, compared with the industry’s median multiple of 5.8, data compiled by Bloomberg show.

“Jazztel is much more expensive, in part, because it is outgrowing the industry,” Francisco Salvador, a Madrid-based strategist at FGA/MG Valores, said in a phone interview. The high price also “implies a potential transaction,” he said.

Dwindling Deals

Pepe Romero, a spokesman at Vodafone, declined to comment on M&A when contacted by phone, adding that the company is focused on offering broadband to customers and developing its agreement with Orange to deploy fiber-optic networks in Spain.

While Jazztel might appeal to Vodafone or Orange Spain, questions about how the company will achieve the goals laid out in its business plan and uncertainty over the region’s economic outlook could deter a sale, FGA/MG Valores’s Salvador said.

“The number of deals in Europe has dropped significantly in the past few years, and it’s still hard to convince investors why they should invest in a country such as Spain, especially if you need to pay a premium,” he said.

Still, Jazztel offers acquirers not only its growth prospects, but also tax credits from losses in past years that could help a buyer boost earnings, Banco de Sabadell’s Bolumburu said. He said that could justify a price of 1.8 billion euros in a takeover, 21 percent more than the company’s market value as of last week.

“A takeover story is definitely taking place behind the scenes, even if we don’t notice it because the macroeconomic crisis continues to get all the attention,” said Aramea Asset Management’s Boehm.

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