Market Insight

Further consolidation in Spanish cable as Euskaltel swoops for Telecable

May 17, 2017

Daniel Stevenson Sutton Daniel Stevenson Sutton Senior Research Analyst, Service Providers & Platforms

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Basque cable operator Euskaltel has announced it is to acquire Telecable, a cable operator based in the Asturias region in the north of Spain, for a total value of up to €701 million. The deal values Telecable at €686 million, with potential for a further €15 million in deferred payments. The cable operator is currently owned by UK investment group Zegona, which is headed by two former Virgin Media executives. The deal will be financed by a cash payment of €186.5 million to Zegona, as well as a 15% stake in Euskaltel. 

Zegona, which describes its investment strategy as “buy-fix-sell”, initially acquired Telecable for €640 million in 2015. Regulatory approval for its sale of the cable operator to Euskaltel is expected in Q3 2017.

Our analysis

The transaction follows Euskaltel’s acquisition of Galician cable operator, R Cable, in 2015. As a result, what were previously three regional cable operators will be consolidated under one company, with a total of 2.3 million RGUs. Post-transaction, Euskaltel will have an addressable market of six million homes in Northern Spain and will have the scale to build cable networks in areas outside of its current footprint. This will present a challenge to Spain’s largest cable operator, Vodafone ONO.  

Euskaltel can be expected to leverage Telecable’s experience and relationships with content providers. Unlike Euskaltel, Telecable currently offers its subscribers access to live Spanish football, due to its rights to distribute Mediapro’s beIN La Liga channel. Euskaltel will look to secure a similar deal, while there are also likely to be opportunities to formulate agreements with other content providers, supported by the scale of the integrated company. 

As well as considerable revenue synergies, the transaction presents several opportunities for cost savings. According to Zegona, Euskaltel estimates these to be worth €245 million, with its experience in integrating R Cable providing strong confidence in synergy delivery.  An example of likely savings include the renegotiation of Euskaltel and Telecable’s respective MVNO agreements. Currently, Euskaltel has an MVNO agreement with Orange, whereas Telecable is contracted to Telefónica. However, before renegotiating preferential terms, Telecable must wait for the end of the minimum agreement term with Telefónica, having only signed the agreement in November 2016.

From Zegona’s perspective, the sale of Telecable reinforces its strategy of buying, optimising and selling operations. In the space of two years, Zegona has improved Telecable’s revenue growth by 2% and cash flow margin by more than 3%. The operator has also seen success in its bundling strategy, with postpaid consumer mobile lines increasing by 16,000 in 2016, as 37% of customers chose quad play packages. While Telecable's subscriber base declined in 2016, with a 3.9% year-on-year fall in TV subscribers and a 4% drop in overall customers, the increase in quad play penetration grew total consumer ARPU by 5.9% in 2016. 

Euskaltel saw its own subscriber base increase in 2016. Combined with its subsidiary R, Euskaltel's total TV subscriber base increased by 33,000 in 2016 - a 13% growth on 2015's year-end figure. The operator's total subscription revenue across its TV, internet and telephony services increased by 4.6% year-on-year to €350 million over 2016.

If the Telecable transaction is approved, Zegona’s leadership team will be part of a newly-formed Strategy Committee at Euskaltel. This will enable the investment group to continue its exert its influence on the Spanish cable market, while also pursuing further M&A opportunities in cable markets outside of Spain.

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