Spanish Small & Midcaps: Euskaltel

Spanish midcap EuskaltelSpanish midcap Euskaltel

The Euskaltel Group is the leading telecommunications operator in the Basque Country and also in Galicia via its “R” subsidiary. Through its two local brands it services a market of 5 million people. Its offer includes fixed line and mobile, as well as subscription television and internet (fibre optic and 4G).

Euskaltel had a busy year in 2015, making it stock market debut on July 1, while on November 27 it closed the buy of the Galician cable operator “R.” As a result, it has become the leading telecoms group on Spain’s Cantabrian coast, both in terms of number of clients and revenues.

The group’s strategy is to maintain the local character of its companies, while continuing to grow towards its goal of consolidating its leading position in the north of Spain. To this end, Euskaltel is in talks with the owners of Telecable with the aim of completing its acquisition in the near future. If this operation doesn’t go ahead, there is some speculation that it will buy Portugal’s NOS.

As an investment bet, we like Euskaltel for the following reasons:

  1. There is an active consolidation process going on in the sector. The telecommunications industry in Spain has recently been the protagonist in numerous M&A deals which have left the market open for 4 big operators. Euskaltel has survived this process and has emerged even stronger.
  2. Favourable context. The strong consolidation movement has provided stability and even fuelled a rise in prices. Furthermore, the fact the operators have introduced packages of integrated services has led to an increase in the average revenues per client and in their loyalty, reducing cancelation rates and portability to competitors. All this means that for the first time in years, operators are once again seeing an increase in revenues.
  3. Big barriers to entering the market. In order to compete in the telecoms market, companies need to be able to make big investments in infrastructures and publicity, or have access to other operators’ networks. As a result, the risk of new big operators emerging in our country is minimal.
  4. A good macroeconomic outlook. Recently, private consumption in Spain has recovered strongly, as can be seen in inflation figures and consumer confidence indices. Access to telephone and internet services has become a basic requirement for Spaniards.
  5. Position as a local industry leader. Euskaltel is the leading company in fibre optic and integrated packages in the Basque country and is also well positioned in Galicia. There is strong recognition for its regional brands, which have a high percentage of implementation.
  6. Strong cash generation. This is probably Euskaltel’s main advantage. Thanks to the big investment made in infrastructures in previous years,  its current (CAPEX) requirements are quite low. Its operating margins are also a lot higher than those of its competitors.
  7. Sinergies and cost cutting. Following its buy of “R”, Euskaltel is benefiting from the consolidation of certain central services, as well being able to negotiate with certain services’ suppliers. These costs would be further reduced with the possible future acquisition of a new operator.
  8. Normal debt levels. The company avoids excessive leverage to be able to take on debt in the event of a corporate operation. In fact its Debt/EBITDA ratio is currently at 4 times, due to the acquisition of “R”. But its strong cash generation  is allowing it to reduce its debt to astonishingly low levels and consider another deal. The company has taken advantage of the low interest rate environment to leverage more than usual at this particular moment.
  9. A competitive offer compared to its rivals both in terms of price and content. Euskaltel and “R” can offer integrated packages which can compete with those of Movistar, Vodafone, Orange and MásMóvil.
  10. Is Euskaltel an M&A target? The 4 big operators in Spain – Telefonica, Orange, Vodafone and MásMóvil – could still be interested in buying other operators and this could put Euskaltel in the frame.

As far as risks to the business are concerned, organic growth in the sector is slow due to the fact the market is very mature. But the biggest risk for the group are the access conditions for the dominant operators’ infrastructure networks. Euskaltel is certainly vulnerable in this respect as it depends on certain services which its competitors provide. Furthermore, the group has taken a bet on not offering TV Premium services like football, which could mean a certain drop in clients, although for the time being it has not had any impact.

In conclusion, we like Euskaltel because of its strong cash generation and good market positioning.  In addition, there are the possibilities for inorganic growth and the good macroeconomic and industry outlook for the group’s business.