Orange and MasMovil Sign $19 billion Merger Deal in Spain

Orange and MasMovil have signed a binding agreement to merge their operations in Spain, the two telecom firms announced on Saturday, valuing the combined company at close to $19 billion.

The merger creates a heavyweight spanning mobile and broadband, challenging top player Telefonica (NYSE:TEF) and analysts say it likely paves the way for similar alliances in markets such as Italy, Portugal and the UK. The merger of the second and fourth largest telecom operators, respectively, leaves third-placed Vodafone (NASDAQ:VOD) in a difficult position, even though it is the beneficiary of a more consolidated market, which is expected to reduce competition and improve operators' profitability. The merger is expected to test the European Commission's appetite for consolidation. The Commission has previously opposed deals that reduce the number of players in large markets from four to three. According to data released in March by market regulator CNMC, Telefonica's Movistar brand has a 28.24% share of the Spanish mobile market, Orange 22.91%, Vodafone 22.26% and MasMovil 20.55%. The Commission's response will reveal whether it prefers a market structure with fewer operators and potentially higher infrastructure investment, as the industry has lobbied for, or whether it will stick to a consumer-centric stance marked by fierce competition and low prices. The Spanish merger is based on an enterprise value of 18.6 billion euros ($19 billion), including 10.9 billion for MasMovil and 7.8 billion for Orange Spain, the companies said in a statement. The combined company will generate annual revenues of more than €7.3 billion and annual core operating profit of more than €2.2 billion, it said. The combined joint venture will be equally controlled by Orange and MasMovil. A €6.6 billion debt package will finance the transaction. This package will include a €4.2 billion upside payment to Orange to compensate for its lower valuation compared to MasMovil given its higher debt level. The deal includes a two-year lock-up provision preventing Orange and MasMovil from selling their shares, an Orange spokesperson said. A possible initial public offering (IPO) is being targeted following the lock-up period, the spokesperson said.