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TELEFÓNICA: POSSIBLE INTEGRATION OF LIBERTY’S UK ASSETS (ANÁLISIS BANCO SABADELL)

 TEF has announced that it is in talks with Liberty Global for a possible integration of its UK assets. The company admits it is in these negotiations, although for the time being it cannot guarantee the success or the final terms of the process.
 Libergy Global offers Pay TV, broadband and telephony services in the UK through the brand Virgin Media and has 5.3 M broadband clients. Moreover, it also has a MVNO based on BT’s network, which expires at the end of 2021 (which would already have been negotiated to change to Vodafone).
 Separately, TEF 02 UK is a mobile-only business with 34 M clients. TEF UK represents 14.6% of the company’s sales, 12.5% of EBITDA and 13% of EV, with a valuation of € 12.9 Bn BS(e). In 2019, sales grew +3.8% in organic terms and EBITDA by +2.3%.
CONCLUSIÓN
 Strategic Sense: TEF only has a mobile business in the UK, and thus this merger would allow it to offer convergent services, which would give it a better competitive situation, even if the market is not focussing on these services at present. This merger would create an operator with an improved future outlook and would generate synergies that would benefit the two companies (such as the change of host for Virgin’s MVNO).
 Awaiting the financial details of the deal, given that the valuation of both assets is similar (looking at the valuations of Virgin Media mentioned in the press of € 12.3 Bn), we think it would not have a significant impact on TEF’s deleveraging (if both companies maintain control), and thus the positive aspects of the deal would centre on the strengthening of the business in the country. For a bigger impact on debt to be seen, TEF would have to allocate debt to the asset (it would deconsolidate group debt), or there is also the option of TEF receiving cash for the asset, as was rumoured in the press. These two options, and against the backdrop of an integration, would mean a larger valuation for TEF O2. Another alternative could be for TEF to relinquish part of the control, which we deem unlikely given that it would go against TEF’s current strategy, which sees its business in the UK as strategic. Thus, we do not expect the impact to be very big on deleveraging.
 Better alternative than an IPO. We think the valuation resulting from the move will be higher than what would come from an IPO of the asset (which the company considered).