MasOrange and Vodafone to create €10 billion fibre company

The Spanish operators are in advanced negotiations to create a new vehicle for their fibre-to-the-home (FTTH) assets, of which they plan to divest a significant, but minority, stake to an institutional investor, Expansion reported on Tuesday.

The paper said it first broke the news in late May, although clearly it did not reach us at the time, however now it has more details and it seems the new business will be larger than it first believed.

MasOrange will contribute FTTH connections to around 9 million homes and businesses, while Vodafone will add 3 million – these are connections it rolled out in conjunction with MasMovil and Orange – as well as some significant cable network customers. The paper notes that it is not the network assets that are important here, but rather the bill-paying customers.

MasOrange will be the main shareholder of the resulting fiberco or netco – the media seems to be using the names interchangably, although interestingly Expansion notes that the overall project has been dubbed Surf, which could give us a clue to a brand name. MasOrange will take a 50% share in the new outfit to Vodafone's 10%, while a 40% stake will be sold off to an investment partner.

The paper points to insurance companies and pension funds as likely investors. Essentially, the telcos are looking for a partner that doesn't want management control, but is simply looking for a decent return.

The partner could have to stump up between €1.5 billion and €2 billion for that 40% stake, it says. However, the business as a whole, which will be created half via capital and the other half with debt, would have an enterprise value, including debt, of between €7.5 billion and €10 billion. The money brought in from the investment partner would be used by the telcos to reduce their own debt levels.

That high valuation is supported by the new company's market share, the paper explained. MasOrange already claims a big chunk of the fibre market in Spain, but the addition of Vodafone's customers gives the new entity a share of around 60% in any part of the country, it said.

However, the benefits of that market share are tempered slightly by the competition concerns the deal could raise. The companies already have a plan to deal with these though. Rather than open up their combined networks to third-party retail customers, they have decided only to serve their own end users.

It might sound counter-intuitive, but the paper insists that that model will help to get the authorities onside and enable the telcos to navigate the regulatory process. Presumably, the project ends up being viewed more as a joint rollout scheme than a merger.

Separately, Vodafone is also working on a fixed broadband arrangement with Telefonica, which perhaps also helps to ease competition concerns... although if all the main players in Spain are in bed with each other in one way or another, it’s hard to imagine much real differentiation in the market.

Nonetheless, Vodafone is reportedly hammering out a pact with Telefonica that, like the MasOrange deal, will help it to migrate its cable customers to fibre when the time comes. 45% of Vodafone's fixed broadband base in Spain uses its own networks – either fibre or HFC – while 55% run over infrastructure provided by either Telefonica or MasOrange. It is logical then that it would seek to migrate HFC customers in the Telefonica footprint to the incumbent's FTTH network and use MasOrange where its cable network is close to that company's infrastructure.

Essentially, Telefonica still has a broader network than its newly-merged rival, and it's natural that Vodafone would want to capitalise on that.

We should find out exactly what will happen soon enough, as far as MasOrange and Vodafone are concerned, at least.

The telcos will not create the new netco until they have found an investment partner, Expansion says, but that could be just around the corner. Discussions are sufficiently advanced that a final agreement could be inked in a matter of weeks; the operators are shooting for the end of July, but should they fail to hit that deadline, we might be looking at September.

Either way, we can expect imminent change in the Spanish fibre market.