ONO and its flexible friends are paying €2.25bn for the fixed-line business of Auna in Spain. France Telecom is taking on as much of Amena as it can swallow. The world remains on its axis, however. 

Late last Friday night saw the announcement of a deal under which ONO, one of Spain’s major cable TV operators will acquire the cable assets of Auna, Spain’s other major cable TV operator, for €2.25bn. Partnering ONO in the takeover are the private equity groups such as JP Morgan Partners and Providence. The way forward for this deal was tentatively cleared last week when France Telecom agreed to pay €6.4bn for 80% of Amena, the wireless operating arm of Auna, Spain’s number three cellular carrier (for more details, click here). Wait three years and FT will take 100% control; Amena’s owners will pocket up to €5bn.

Fair exchange, no robbery. Robbery, of course, was at the top of the agendas of the would-be alternative investors in Auna. FT was quick to say that no job losses would follow its acquisition of Amena, arguing that this Spanish cellular business was still in the development phase.

You mis-read it here first
Early on Friday (click here), we noted that Auna’s cable assets were likely “to be sold to a consortium led by Spanish cable operator ONO, although those familiar with that strand of negotiations suggest that the fat lady’s mouth is still clamped firmly shut as far as that one is concerned.” By Friday night, the orotund soprano had gargled and her vocal cords had been freed. So we were half right.

There are three aspects of the carving up of Auna and its assets that should be filed under the heading ‘noteworthy’.

Muscle bound
First, France Telecom has usurped a long-intended and cosy takeover of the whole of Auna which seemed to have been stitched up between a number of private equity and VC players. The latter may be starting to learn that cash and credibility counts for more than smart-suited smarm-meisters and Gucci-shod lawyers in transactions such as these. So while it is true that financial rather than telecom players own the enlarged ONO (General Electric, Bank of America and CDP Capital are the original owners, now backed by JP Morgan, Providence, Quadrangle and Thomas H Lee) and true that they recruited more of their number to join the bid for Auna’s cable assets, compared to the original scenario which saw the wireless and cable assets carved up among the financiers, the bastard offspring of Wall St have lost.

Now, the number of utility-based owners of second carriers in telecom operating still committed to them – witness ENEL in the case of Italy’s WIND – is dwindling. But for a market in a state approaching low-level Redux, the vulture capitalists may find themselves squeezed out. They are no longer the only finance game in town, as telco warchests swell; rather, quite soon, they might be the most sordid amongst many: not even primus inter para-sites, to mangle some Latin.

In the case of Auna, the arbitrageurs had intended to buy at rock bottom and sell on to true industry players at a premium. They even cavilled when an industry giant (FT) dealt directly with Auna’s fluttersome board and cut out the private equity consortia from their expected role as middlemen. Weep not for them: if you had a grave, they’d spit on it.

Easy money (and weak as well)
A second noteworthy outcome of this deal is the way that while vulture capitalists failed to drive up the bidding for assets – opting instead for a cartel-like tendency to keep the purchase price as low as possible – the interest of a serious industry player drives the price up straight away. In fact, it’s easy for the serious industry player. If FT had started courting Amena one year ago, T-Mobile among others would have been in the hunt before a deal could be concluded. Instead, the well-scrubbed American lawyers took their eyes off the ball and the state-backed French monster waltzed in and took over.

Last year, the private equity players placed a €11bn price tag on the Auna group. Just seven months later, the involvement of industry players like FT and ONO has driven the net value to nearly €13bn. Some private equity bunnies have complained that they were used to flush out serious investors like FT in the case of Auna. Either my heart bleeds at the thought, or my eardrums bleed at the sound of this bleating from those who run websites in which ‘buy my grandmother’ is always to be found in the Main Menu.

Waiting for the other shoe to drop
A third point to note is that cable consolidation as has now happened in Spain is ripe to occur in other parts of Europe. In the UK, for instance, where NTL and Telewest have been struggling to keep free from Chapter 11 for long enough to merge since 2000 (and talk of a merger pre-dates that), consolidation is a natural next step. Sub-Redux strategy has as one of its planks the mantra, “anything you can do, I must do better”.

In the cable business, the common denominator is that many regimes awarded exclusive (that is to say, ‘monopoly’) franchises in certain regions for cable provision in the 1980s and 1990s. In such cases, the economic logic in terms of economies of scale is merger or some for of consolidation. That was difficult during the 1980s when franchisees were carving out market share for themselves and building brands. Likewise, the American interests led by the RBOCs that invested heavily in European cable, while prevented from doing so at home, and the European telcos that chose to dabble in neighbouring markets, simultaneously ‘upped the ante’ and, inadvertently, ‘downed the dynamism’ of network build for cable players.

It has become easier since ‘triple-play’ offerings have come to the fore. Telephony, TV and broadband Internet access looks like a dream ticket – but it is one whose shelf-life is diminishing. New flavours of TV-over-broadband and IPTV are coming for sure. It won’t happen overnight despite what industry agitprops will say. But it will happen. It time-limits the period during which cable players, still basking in the glow of triple-play or as we must now call it, ‘multi-play’, have that slice of the market to themselves. Unless they are organised in a corporate sense and compos mentis-alised in a strategic sense, they are done for.

Winners? Losers?
There’s a corporate/investor balance sheet to be addressed here. Some you win and some you lose.

France Telecom is a winner, seamlessly adding another national network and its 9.8m customers to the Orange ‘family’. Santander, Endesa and Unión Fensosa (Auna’s owners) will eventually return to their ‘core businesses’ of banking and energy, richer to the tune of anything up to €7bn on the back of the Amena/Auna disposals.

Telefónica is arguably a loser. As Spain’s incumbent fixed and mobile operator, it will face more intense competition in the fixed and cellular markets that it has dominated for more than a century. It has the tools with which to fight back. It will do so with a shrewd mix of the technology at its disposal, the patience of its shareholders and an adventurist spirit in markets ranging from Latin America to the Czech Republic and China.

And the money men lost too. They strutted; they stuttered; they stumbled; and they fell. I can’t be bothered to name them: their DNA is all over the misguided bid for Amena/Auna. And they’ll be none the richer for the experience.
Jim Chalmers