Romanian telco upstart will be M&A party pooper

Digi Communications

01/12/2023 07:15

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Pamela Barbaglia
       LONDON, Nov 30 (Reuters Breakingviews) - Romania’s Digi
Communications  DIGI.BX  may be the fly in the ointment of a
long-awaited wave of consolidation in European telecoms. M&A has
long been hailed as the cure for Europe’s sleepy incumbents. But
the $907 million firm is likely to use any such deals to grab
market share.
    Transylvanian millionaire Zoltán Teszári built his fortune
as a cable TV entrepreneur in the 1990s, later launching Digi’s
mobile operations in 2007. The company, now Romania’s largest
telecoms group , also operates in Spain and Italy, and is
preparing to enter Portugal and Belgium. Digi’s annual revenues
rose 17% to 1.5 billion euros last year and are estimated to
grow by 10% a year until 2025, according to LSEG.
    Teszári, who is now Bucharest-listed Digi’s president and
holds 60% of the company’s shares, looks set to be the big
winner of a tie-up between Orange  ORAN.PA  and MasMovil in
Spain. That deal is a test case for European mergers, as it will
shrink the number of mobile players in the country from four to
three. Telecoms executives hope such deals, which may also
follow in Italy and France, will give them scale and pricing
power. But EU competition watchdogs fret that fewer players will
dent competition and have so far either blocked deals or imposed
tough remedies. That’s why Digi has agreed to buy assets from
both Orange and MasMovil, Bloomberg reported on Nov. 29,
potentially smoothing the deal.
    French tycoon Xavier Niel provides a worrying precedent.
Back in 2018 CK Hutchison’s  0001.HK  3 Italia and VimpelCom’s
Wind Telecomunicazioni were forced to sell assets to his firm
Iliad to clear a merger designed to create Italy’s third largest
player, Wind Tre. Since then, Niel has built market share by
offering discounted tariffs, and the Italian market remains
cutthroat. Wind Tre’s annual revenues declined 6% last year
while EBITDA was down 19%.
    Digi’s lean model may give it an edge. It’s relying on cheap
Romanian labour to build its Spanish infrastructure – a model
Teszári may replicate in Portugal. Despite its small size, it is
just as profitable as much larger, international peers. Next
year it is expected to convert 34% of its revenue into EBITDA,
trumping Vodafone’s  VOD.L  31% margin, according to LSEG
forecasts.
    Size is a weakness. Digi lacks the deep access to capital of
its larger European rivals, potentially hindering dealmaking.
Still, Teszári has avoided gorging on debt: his group has a
modest leverage ratio of 2.3 times EBITDA, as of Dec. 31, 2022.
Moreover, it trades at a respectable 4.6 times forward EBITDA
including debt, according to LSEG data, marginally above peers
like Vodafone or Telefonica  TEF.MC . That may allow it to raise
fresh equity if necessary.
    Teszári’s ambition may help Europe’s incumbent telecoms
groups consolidate their national operations. But they may find
that the future is just as challenging as the past.
    Follow @pamela_msg on X
    
    CONTEXT NEWS
    Digi Communications has reached a preliminary deal to
acquire assets from Orange and MasMovil, potentially clearing an
18.6 billion euro merger of their Spanish operations, Bloomberg
reported on Nov. 29.
    EU antitrust regulators warned in June that Orange and
MasMovil’s planned merger of their Spanish operations may reduce
competition and push up prices. The EU competition enforcer sent
a statement of objections to the companies on June 27, setting
out its concerns over deals that reduce the number of big mobile
telecoms operators in a market to three from four.
    Digi is in talks with Australian investment firm Macquarie
and UK fund manager Abrdn to sell a stake in its fibre optic
network in Spain as it seeks to raise cash to invest in the
country, newspaper Expansión reported on Sept. 27, citing
sources with knowledge of the process.
    Digi signed a five-year agreement on Aug. 28 to partner with
Belgian state-controlled telecoms firm Proximus and obtain
wholesale access to Proximus’ mobile network as it plans to
enter the market.
    Digi’s subsidiary Dixarobil won an auction in 2021 for
frequency bands in Portugal, where it is due to start providing
services in 2024.

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Graphic: Digi’s expansion in Spain    https://tmsnrt.rs/4106CTg
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 (Editing by Neil Unmack and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  BARBAGLIA/ 
pamela.barbaglia@thomsonreuters.com; Reuters Messaging:
pamela.barbaglia.thomsonreuters.com@reuters.net))