EUR 100.00 For Business Accounts Only

IBERIAN DAILY 20 JULY (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKIA, CONSTRUCTION SECTOR, IAG, OHL, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Awaiting news from Europe
Few changes in European markets (the Euro STOXX50 ended practically unchanged), where the Ibex35 stood out on the negative side (-0.5%), hit by the statements made by A. Merkel on the negotiations of the European recovery fund, where Northern and Southern states would be far from reaching an agreement. Following a weekend of confrontation, leaders will resume talks today once the 4 frugal countries could accept the € 390 Bn proposals in transfers (vs. € 500 Bn) although subject to some discounts in their contributions to the common budget and to an agreement in other controversial issues, such as the conditions and control of payments. In the Euro STOXX, Automobiles (benefiting from Daimler’s results) and Utilities were the best performers, while Financials and Construction were the worst performers. On the macroeconomic level, in the euro zone, June’s general inflation confirmed the slight rise expected while the core component moderated in line with expectations. In the US, mixed data in the real estate market, rises in housing starts speeded up while construction licenses moderated unexpectedly. July’s University of Michigan sentiment index deflated unexpectedly. In Japan, July’s exports fell although showed some floor. On another note, the minutes from the BoJ meeting discussed the threat of deflation although new monetary measures were ruled out. In US results BlackRock and State Street came in better than expected.
What we expect for today
Stock markets would open mixed awaiting the outcome of the negotiations of the Recovery fund and the development of the results season amid doubts on the reopening of the economy in a number of US states. Currently, S&P futures are down -0.45% (the S&P 500 was up +0.10% vs. its price at the closing bell in Europe). Volatility in the US dropped (VIX 25.68%). Asian markets are trading with mixed results (Japan -0.14% and Hong Kong +0.35%).
Today no relevant indicators will be released. Negotiations on the EU Recovery fund continue. In the US, a round of negotiations over a new fiscal package begin in Congress. In US business results, Halliburton, IBM or Provident, among others, will release their earnings. As for auctions, Holland will issue € 4 Bn in 3 and 9M T-bills, Germany € 8 Bn in 5 & 11M T-bills and France € 10 Bn in 3, 6, 9 & 12M T-bills.


COMPANY NEWS

TELEFÓNICA, BUY
TEF has submitted during the weekend a binding bid to acquire Oi’s mobile business with TIM and Claro, although the amount or the allocation of assets have not been unveiled. The bid is subject to meeting some terms, in particular, being selected as first bidder to match the best bid submitted in the open competitive process. Note that Oi is the fourth-largest Brazilian mobile operator (market share of around 16%), and within its process of leaving receivership it has stated that it will put its 100% of its mobile business up for sale through an auction with a minimum price of BRL 15 Bn (€ 2.54 Bn). Oi’s creditors are expected to meet in August to analyse the situation and the auction will be carried out in 4Q’20. According to Reuters, Oi would have received another bid from a foreign strategic player with small presence in Brazil and the daily O Globo has reported that Algar Telecom would be also taking part in the bidding process in alliance with Singapore sovereign fund.
We welcome the fact that the bid has been jointly submitted with TIM and Claro, as this reduces the possibilities of higher counter bids, as any other player would generate fewer synergies. We do not also believe that the competition restrictions will be significant either. We believe that this deal is one of TEF’s drivers, as the consolidation of the Brazilian market would bring lower competition and investments (frequencies, etc.). The starting price reference of around € 2.54 Bn would mean ~8x EV/EBITDA BS(e) vs. ~5x TEF and vs. ~7x from our implied valuation of TEF Brazil. If the investment was split with TIM and Claro, this would mean a +2.1% increase in NFD for TEF, and it would have a very positive impact on the valuation (thanks to the synergies that would allow the purchase ratio to be reduced significantly). Note that TEF’s business in Brazil accounts for 21% of EBITDA and 19.8% of EV.