Wed. Feb 21st, 2024

Not even fifteen days had passed into this year, 2023, and two resignations had already been formalized in the telecommunications sector: that of the CEO of Cellnex, Tobías Martínez, and that of his Vodafone counterpart, Colman Deegan. It was a premonition of the turmoil that was going to happen later. The big names in this market face the closing of a year in which it is confirmed that Telefónica will once again have state participation – and that of an Arab operator -; The first operator with a mobile license in Spain certifies its departure from the country and Orange and Másmóvil must give more strength to an operator unknown to the general public until not long ago with the aim of passing the tough Brussels exam.

The operators came to this period that is now coming to an end especially worn out by many quarters of tough commercial battle and with the general feeling that this ‘status quo’ was about to be broken. The reality is that what he did was jump into the air. This deterioration was reflected in the stock market, which was the prelude to the shareholding earthquake in Telefónica. Aside from the threats of some activist fund in the past, the telecom leadership chaired by José María Álvarez-Pallete had been a ‘raft of oil’. Until this historic year.

The executive president of the owner of Movistar had been in charge of explaining the benefits of the operator and the possibility of investing in the face of the stock’s decline in a roadshow held in recent years. “If I explain Telefónica’s plan to you, you’ll turn purple and buy shares,” he assured him in February 2020. He met with all the international funds, including the sovereign ones, to achieve that ‘white knight’ that would reinforce the capital. PIF is the state fund of Saudi Arabia and is the one that controls STC, the telecom counterpart of that country. The company burst in at the beginning of September announcing the purchase of up to 9.9% of the company. That wear and tear had made that position worth just 2,000 million.

This weakness in the face of a surprise operation like this – the announcement came with Álvarez-Pallete in the United States at several events with investors – led the Government to resurrect that old aspiration of becoming a shareholder in “the most strategic company in Spain”, in the words from Vice President Nadia Calviño. This translated into the authorization of the Council of Ministers a week ago in which it committed to matching the offer of the Saudis, given their refusal to stay at 4.9% -and not enter the council-. Conclusion: the State Industrial Participation Company will be the largest shareholder. The shareholding is revolutionized a quarter of a century after a complete privatization – which contrasted with the partial ones carried out by France or Germany and which allowed it to reach this crisis in the sector with relevant public positions.

That same weakness of the Spanish market, especially competitive on price and with a lot of pressure on ‘low cost’, had placed Telefónica’s business here in the sights of Telefónica analysts. The group had to prepare a new roadmap and the internal ‘rumor’ about a new casualty plan intensified, as had happened on other occasions. But a new era required new ones: a sick leave plan (PSI) was discarded and an ERE was put on the table – no measures had been made since the controversial one in 2011 – which has finally been agreed in record time with the unions and which will involve 3,400 departures – 20% of the total workforce among the three main subsidiaries.

At Vodafone, weakness also took its toll. The first was the departure of Colman Deegan as CEO after just two and a half years in office. The operator placed a person from the ‘house’ before what seemed at that moment a temporary movement waiting to see what he would do with the subsidiary. Two months after Mario Vaz took office, it became official: the company opened a “strategic review”, which contemplated the sale. This occurred just five months after those prescient words from the global CEO, Margherita Della Valle. The buyer was an old acquaintance for the local sector: Zegona, the British fund that sold Euskaltel to Másmóvil. Their ways are different from those of the British group and in the first stages they put the staff on alert, with potential adjustments – “selective layoffs” – and with more aggressive measures.

The big unknown with which 2023 started was whether the merger of Orange and Másmóvil that took place in 2022 would have ‘remedies’ that would once again feed a fourth operator. The process has been very long. Both have resisted to the maximum, with their own and other managers defending in all possible forums that no type of measure was necessary. Finally, the Commission has led them to voluntarily present compensation that will make the Romanian Digi, which is ‘licensed’ after years as an applicant, stronger. Compensations that maintain the structure of four operators that has led to a tough price war in the last five years.

In the case of Cellnex, there was no weakness in the tower management market and other assets. What changed was the macroeconomic context, with higher interest rates and more weight of debt. This led to the resignation of the project’s alma mater, Tobías Martínez, just in January. And this opened an unprecedented struggle in a company that had also been characterized by shareholder and governance stability. Chris Hohn, the TCI fund activist, seized the moment and bought to accelerate the succession. This led to an earthquake: the departure of the non-executive president and one of the independents to smooth the appointment. A person close to the Benettons, Marco Patuano, was chosen. And with it has come the change of script: organic growth, a stop to asset purchase operations and debt reduction to recover investment grade.

And now that?

This has happened in twelve months. Now, the large companies in the sector face a 2024 that is destined to stabilize everything after the earthquake. At Telefónica, the entire process linked to the shareholding reorganization has to be substantiated. First with the authorization (or prohibition) of the Government for STC to reach 9.9% of the operator. In the market it is assumed that the green light will be given, although the Executive is looking for formulas to preserve matters related to National Security. And these should also be put on the table. In addition, the purchase of Sepi will have to be completed – it will take several months – and the potential entry into the board of directors.

For Zegona, the year 2024 will be key. His plan promises that there will be many new developments, especially as far as the sale of Vodafone Spain assets is concerned. In addition, it will have to decide whether the “selective dismissals” remain there or a greater workforce adjustment is carried out, which is ultimately the great fear of the unions. And for Orange-Másmóvil? It will be the exercise of integration, which will entail changes in the management leadership and also duplications that will have to be resolved. Orange has said that the promised synergies only referred to operational or industrial aspects and not labor ones. The entity resulting from the joint venture will clear up doubts.

And in the case of Cellnex, all eyes are on the debt and the rating. The infrastructure manager has maturities that are close to 2,000 million euros – in 2023 these were only 143 million. This forces a refinancing that cannot be executed under good conditions if that investment grade is not achieved by the S&P rating agency. And that will be the great objective. Already this 2023 they have carried out a small ‘sale operation’ with the partial divestment in the Nordic countries and the previous work to do the same in Ireland.

The earthquake occurred in 2023 and will completely change the telecommunications map in Spain. But now there are the aftershocks that usually arrive after earthquakes and, above all, the recomposition after the shocks. The first milestone will be the conclusion of Telefónica’s Employment Regulation File (ERE) and the final pronouncement from Brussels on the great merger.


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