Orange confirmed it is in discussions on merging its Spanish operation with rival Masmovil, with the two aiming to create a 50:50 joint venture for their offerings in the country to better compete in the highly competitive market.

The long-speculated move is expected to create a combined business with an enterprise value of €19.2 billion and more than 20 million mobile, 7 million fixed and almost 1.5 million TV customers.

Orange noted that the JV would have revenue of more than €7.5 billion and generate synergies with an annual run rate in excess of €450 million from the third year after the closing of the transaction.

Furthermore, the agreement includes a right to trigger an IPO for both parties and a path-to-control option for Orange to consolidate the combined business if this happens.

The proposed merger also represents the last major transaction of outgoing Orange chairman and CEO Stephane Richard, who stated the JV with Masmovil would be “capable of making the investments required to develop the Spanish market”.

Masmovil is owned by London-based Lorca JVCO following a takeover of the operator by Cinven, KKR and Providence at the end of 2020.

It was previously suggested ownership of any JV with Orange would be split between the France-based group and Masmovil’s parent companies.

The operator groups expect to sign the agreement in Q2 and conclude the transaction by the same quarter in 2023, although this will be subject to approval from relevant administrative, competition and regulatory authorities.

Indeed, securing regulatory approval from the European Commission will be one of the biggest obstacles.

Merger matters
Kester Mann, an analyst with CCS Insight, noted the deal “is the first major test of regulators’ appetite for in-market consolidation since the pandemic” and “could open the floodgates to a host of other alliances in markets such as Italy, Portugal and the UK” if approved.

Mann suggested Orange and Masmovil’s move “could be considered a blow to activist investor Cevian Capital”, which is reportedly pushing for the consolidation of Vodafone Group operations in several markets.

Vodafone CEO Nick Read also asserted the company was taking proactive action towards in-market consolidation, although it rejected a recent approach by Iliad in Italy.

An in-market consolidation in Spain is nevertheless likely to be regarded as a welcome development by all market players, with Orange and Vodafone executives frequently bemoaning the fierce competition in the country, cutting staff and making other structural changes in attempts to turn their respective operations around.

Orange took a huge writedown of the value of its Spanish unit in July 2021 due to the worsening competitive situation.