Orange has offered buy Spanish telecoms operator Jazztel for around 3.4 billion euros (4.40 billion US dollar), a deal that could help the French company jump ahead of rival Vodafone in the country's mobile market.
Orange's offer for Jazztel is at 13 euros per share in cash, valuing it at 3.4 billion euros. The French company will pay for the acquisition with hybrid bonds and a capital increase of up to 2 billion euros.
Jazztel Chairman Leopoldo Fernandez Pujals has agreed to sell his 14.5 percent stake.
"We are doing this deal to accelerate our growth in Spain, particularly in fixed-mobile convergent offers," Orange Chief Executive Stephane Richard said.
"The new company will be the incontestable number two in fixed services and third in mobile behind Vodafone, but we think we'll be able to take second place pretty quickly."
Consolidation in the Spanish telecoms business has been brewing for months, driven by tough competition and falling prices during the country's recession.
When number two mobile operator Vodafone Group agreed to buy cable operator Ono in March for 7.2 billion euros, Orange found itself isolated in its second-biggest market without a fixed-line network. [ID:nL6N0ME17B] And leader Telefonica has increasingly pushed discounted bundles of fixed and mobile services to keep customers loyal.
Orange hired Bank of America Merrill Lynch to examine its options in Spain, sources earlier told Reuters, and the bank went on to advise on the Jazztel deal.
Jazztel would give Orange about 1.5 million broadband subscribers and help it match competitors' fixed, TV and wireless packages. It plans to keep both brands.
Orange said the deal would add to earnings per share and operating free cash flow by 2017, and would help it save 1.3 billion euros mostly through network efficiencies. Jazztel now rents capacity on Orange's network to provide mobile services.
Orange said its offer values Jazztel at 8.6 times 2015 earnings before interest, tax, depreciation, and amortization (EBITDA) after cost savings, or a 34 percent premium to Jazztel's average share price in the past month.
Investment bank Raymond James said Orange was paying 12 times 2015 core profit (EBITDA) before synergies, higher than sector take-out multiples (price tags) of 8-9 times.
"While we believe Orange has achieved the unlikely feat of making Vodafone's bid for Ono look relatively inexpensive ... we regard the deal as constructive for the Spanish market," Citigroup analyst Simon Weeden wrote in a note.
Vodafone paid about 10.5 times EBITDA for Ono.
Jazztel shares rose 6 percent to 12.75 euros. Orange fell around 2 percent, partly in response to the share issue plan.
Orange had considered a bid for Jazztel earlier this year but walked away over disagreements on price and because main shareholder Pujals wanted cash, a person familiar with the matter said. Orange initially proposed a merger of its Spanish business into Jazztel and then a share issue there instead of at Orange, the person said, but Pujals rejected the idea.
Orange's board voted 13 to 2 in favor of latest deal and workers' representatives voted against because of what they considered as a high price and potential job losses of around 400, the person familiar with the matter said.
YOIGO OFF TABLE
The offer also means Jazztel and Orange will not push ahead for now with the potential acquisition of TeliaSonera AB's Yoigo, Spain's smallest mobile player.
Both had said previously they were studying bids for Yoigo, which parent Teliasonera wants to sell because it considers the business "subscale."
"Today we don't need to acquire Yoigo and we will focus on the combination of Orange and Jazztel," Richard said on a call with analysts. "But we support consolidation in general and if we can play a role later on, then we will consider it."
By paying for Jazztel in part through a capital increase, Orange will be able to stick to a target for net debt of no more than 2 times operating profit by year end.
"We don't want to take any risk (with credit rating agencies) or put pressure on our capacity to deliver on fiber broadband investments at home," Orange finance chief Ramon Hernandez said.
Richard said Orange would try to keep the capital increase as small as possible to minimize shareholder dilution.
If it carried out the maximum 2 billion euro rights issue, it would represent a 6.7 percent dilution for shareholders, according to investment bank Raymond James.
Orange expects the deal to close in the first half of 2015. Richard said competition regulators would undertake a shorter "phase one" review, used for deals with less market impact. The deal also needs shareholder backing of at least 50.01 percent.
Spain's Industry Minister Jose Manuel Soria told RNE radio: "The consolidation process leads to fewer operators, which will have more muscle to invest in ... networks and will improve offers to consumers."
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