Changes expected down the line for Spanish cable sector

The four cable operators in Spain could go on the block at one point or other. About three-quarters of their equity capital is in the hands of private equity and venture funds and financial partners that are keen to cash in on their investments. Banks also have an incentive to offload their holdings because of the introduction of new provisioning regulations for exposure to industrial companies.

Corporate movements in the medium term are therefore expected in sector leader Ono, the Galician operator R, Euskaltel in the Basque Country and Telecable in Asturias. The companies are heavily indebted and are looking to strengthen their balance sheets in order to make themselves more attractive to potential buyers or to prepare the way for a possible stock market listing.

Stirrings in the shareholder structure of Ono, which accounts for about three-quarters of total revenues in the Spanish cable sector, began before last summer when minority shareholders urged company founder and chairman until 2008, Eugenio Galdón, to sell his stake. Galdón controls a third of Val Telecomunicaciones, which in turn holds a 5.4-percent stake in Ono. Other shareholders in Val Telecomunicaciones, who include Indian investor Ram Bhavnani, could be interested in offloading their stakes.

Other Ono shareholders include leading Spanish bank Santander with a 4.4-percent stake and the funds CCMP, Providence, Thomas H. Lee, Quadrangle, General Electric and Caisse de Dépôt, along with other financial partners, who have never been paid a dividend.

"A private equity firm usually sells its stakes between four and six years after acquiring them," says Carlos Lavilla, the chairman of the Spanish Venture Capital Association (Ascri). "They always want to maximize their return but if they have been too long with the company, they will sell anyway."

The funds will sell when they get the price they are looking for"

Private equity funds took stakes in Ono in 2005 in order to finance the purchase of its competitor Auna. Some shareholders have been there longer, such as General Electric, which provided seed money in 1998, and Quadrangle, which has been a shareholder since 2003.

Ascri's Lavilla insists that these funds "will sell when they get the price they are looking for or when they see they are never going to get that price. It's purely a financial decision."

Ono's management team is working on improving the company's balance sheet, a task considered essential for its shareholders to be able to cash in on their investments, whether in the form of an initial public share offer or a direct sale. "We have always aimed at a stock market launch as the next natural move," a company spokesman says. "We have finished upgrading our network to provide a 500Mb service to small- and medium-sized companies and 200Mb to retail customers. We are investing 250 million euros a year to improve our products and increase our client base."

Ono has accumulated debt of 3.330 billion euros due to the investment effort it has made, a sum equivalent to five times its annual gross operating profit in the form of EBITDA. While the company believes its level of leverage is not generating any particular management problems, a number of analysts beg to differ. "It makes it difficult for any telecommunications operator to list," says Ivan San Félix, an analyst with the brokerage Renta 4. "Telefónica, for example, is less leveraged and has strengths such as its dominant market position and offers a dividend yield that it is hard to believe that Ono could surpass."

Ono's board has yet to make any decision regarding a possible listing and has not contracted the services of any investment bank to pave the way for such a move. However, there has been speculation that cellphone giant Vodafone could be interested in taking a stake in Ono, although the company spurns this idea. Japanese investment bank Nomura said in a recent report that purchasing the cable operator would provide Vodafone with a fixed-line network that would allow it to compete aggressively with Telefónica's Fusión package of fixed, mobile, internet and television services.

Brussels would like to see a single market with a few strong competitors

Vodafone has the cash to go on a shopping spree after offloading its 45-percent stake in US mobile giant Verizon Wireless for 98 billion euros. It is also seeking to complement its mobile network with a fixed-line one. It bought the cable operator Cable & Wireless in July 2012 and later Germany's Kabel Deutschland. "It would make sense for it to buy Ono and have access to 40 percent of Spanish households at the drop of a hat," consultant Roland Berger argues. "The investment would be profitable from the start because of the synergies of the two companies and the complementary nature of the two networks." Ono sells mobile services but does not have its own network.

Ono's cable network extends to 45,000 kilometers throughout Spain and reaches seven million homes. "We have invested nine billion euros on it and it is the only fixed-line alternative to Telefónica's," the Ono spokesman said. That is a hefty investment in a market where the trend for prices is downward. Besides not receiving dividends, Ono's investors had to fork out another 200 million euros in 2010 to reduce the company's debt.

The European telecommunications market as a whole has also started to consolidate and the European Commission would like to see a single market with a few strong operators, meaning that companies of the size of the Spanish cable operators would be likely candidates to be absorbed. "R, Telecable and Ono together have a business worth around two billion euros and have venture fund shareholders looking to offload," says Enrique Quemada, the chief executive officer of ONEtoONE Corporate Finance, which values R at 565 million euros, Telecable at 270 million and Ono at over one billion. "Acquiring this business presents an opportunity for an international investor that wants to enter the Spanish markets and the only investor with the ability to take on an operation of this scope is Carlos Slim, who is in competition with Telefónica in Latin America."

The recent purchase of nationalized bank NCG Banco by Venezuela's Banesco could see the Galician lender offload its 30-percent stake in R. In the case of Telecable, its controlling shareholder, with an 85-percent stake, is private equity fund Carlyle, which only came on board two years ago and would likely want to stay on for another two to put more value into the Asturian operator before looking to sell out. Telecable's other shareholder is Spanish lender Liberbank with a 15-percent stake.

In the case of Euskaltel, its strong links to the Basque Country would probably delay any divestment decision on the part of its shareholders, which include Kutxabank with a 49-percent stake, down from 70 percent a year ago. A spokesman for the Basque savings bank said the lender has "no intention of divesting" its stake, neither in 2014 nor in 2015. Kutxabank is willing to make the necessary provisions for its exposure to an industrial company.