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Western EuropeJune 4 2006

Globalising like there’s no mañana

Massive overseas expansion by once-local firms has led to humming activity in Spain’s capital markets arena. Jules Stewart explains.
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A few years ago, the suggestion that a Spanish company would control the fixed-line telephone business in many parts of the world, that one would be bidding for the world’s largest airport operator, that a third would rank as Europe’s largest clothing retailer, or another take over a major British bank and join the list of the world’s top 10 financial institutions would have been dismissed as fanciful. Yet this is the case of Telefónica, Ferrovial, Inditex (Zara) and Grupo Santander, respectively.

It follows that this wave of international expansion and acquisitions, which requires huge amounts of financing, was bound to make Spain one of Europe’s most dynamic centres for capital markets activity.

“On one level, the Spanish capital markets are pretty much in line with what’s happening in other European countries,” says David Burns, country head at Schroders, Spain. “However, what people don’t fully appreciate is how big Spanish companies are becoming. We’ve now suddenly got Spanish banks buying other banks in Europe and the US, there are foreigners coming in to buy Spanish companies, and in that sense the market has really grown up.”

Hidden value

Mr Burns explains that in Spain, like elsewhere, companies have cleaned up their balance sheets significantly over the past three to four years. The corporate sector is in good health and contains a lot of hidden value. “There is a great deal of liquidity in the market, companies are cash rich and so are most investors,” he says. “Hedge funds and venture capital companies have been appearing on the scene over the past few years and this adds an extra element of movement.”

Francisco Sánchez-Asiaín, head of investment banking at UBS Madrid, says that the Spanish economy has been performing better than in most of the rest of Europe, which is evident in levels of capital markets activity. “We feel that there is every sign that the upswing will continue,” he says. “The cycle should be slowing but we see no signs of this happening in the near future.

“There is a strong positive sentiment that has been fuelled by European funds received in the past years. These have acted as accelerators, and this has been helped by the liberalisation of the Spanish market and the positive economic environment.”

The Spanish stock exchange has been a hive of initial public offering (IPO) activity expansion at home and in Latin America over the past few years, and there is more volume going through every day. Not much of it, however, is Spanish. One look at the Ibex 35 companies drives home the point that most major shareholders are not Spanish, and this is part and parcel of the country’s internationalisation.

Of the free float of most companies, about 30% is in Spanish retail hands and 20% to 25% in Spanish institutional funds, with the remaining 50% in international funds. This was not an easy concept for the Spanish authorities to take on board and more than once the government expressed worries over the threat of a foreign takeover of one of the large Spanish banks. Eventually the partisans of economic patriotism woke up to the fact that Spanish banks are not Spanish at all.

Foreign ownership

Taking Santander, the largest one, as a case in point, the Botín family, whose name has been linked with the bank for generations, probably controls 4% of the bank’s shares, while the rest of the capital is mostly in foreign hands.

“The pipeline of new issues in equity is as strong as we have ever seen and even on a par with the heyday of 1999-2000 if you strip out privatisations, which in Spain are practically over,” says Manuel Esteve, head of equity capital markets (ECM) for Spain and Portugal at JPMorgan, Madrid.

“There is a huge backlog of transactions and a lot of concentration around the real estate sector, with at least four or five deals coming through the pipeline in the next six to 12 months,” he says. The sources of IPO issuance are still mainly family-owned companies, which is a distinctive feature of Spain versus the rest of Europe, bar Italy, according to Mr Esteve.

In terms of issuance, the private equity world is still relatively small compared with that in other European countries because big investments by private equity in Spain happened later than in other parts of Europe.

“If you look at the lacklustre years in terms of issuance [2001-2003], when most of the issues in Europe were for restructuring balance sheets, there was very little activity in Spain,” says Mr Esteve. “In particular, and once again this is in comparison with the rest of Europe, there was no issuance from distressed financial institutions or from the telecoms sector because Spanish companies had some of the most sound capital structures in Europe, and as such there was a very limited number of rights issues.

“Likewise, IPOs were few and far between,” says Mr Esteve. “Coming into 2004-2006, these sound capital structures have allowed Spanish companies to expand their international acquisition activity in a manner that most people would not have expected five or 10 years ago.

“Some examples of this are Santander’s acquisition of Abbey, Telefónica’s acquisition of O2, and Ferrovial bidding for British Airports Authority [BAA], the world’s largest airport operator.”

Overseas expansion

There is no doubt that this new international dimension of the Spanish corporate world has created local multinationals that have benefited tremendously from Spain’s economic growth. Jesús Martínez, analyst at Standard & Poor’s in Madrid, says companies have used that momentum to expand overseas. “They first strengthened their business in Spain through consolidation in different sectors and used this to start buying assets abroad,” he says.

“EU funds are another important factor that has served as a trigger to create a virtuous cycle that moves the economy. The influx of funds triggers improvement in other sectors and this in turn creates more wealth in the economy.

“The decline in interest rates is another major factor. Ten years ago, Spanish rates were 10% compared with 2.5% to 3% now. Also, unemployment was 24% 15 years ago, when it was a crippling factor, and today it is 8%. There are no signs of a slowdown yet, but it will come. This year still seems to look very good and the economy is growing at a dynamic rate,” says Mr Martínez.

“There are some factors to watch, however, like the increasing leverage of the private sector over the past few years, along with rising property prices.”

The property boom has helped to fuel the securitisation market, particularly in covered bonds, known as cédulas hipotecarias. The three arrangers for these pooled transactions, Ahorro Corporación Financiera, Caja Madrid and InterMoney Titulización, set up new structures last year to offer financial institutions faster access to the market, among other things.

The Spanish securitisation market overall recorded an impressive 36% year-on-year volume growth last year, with an increase in issuance volumes, number of transactions and increasing maturity forecast for 2006.

Spirit of independence

The Madrid stock exchange remains something of an enigma because it has so far remained aloof from the merger process that has reshaped markets in Portugal, France, Belgium and the Netherlands. Even London, which has been fighting off hostile bids for several months, is expected to end up in some sort of alliance in Europe or the US.

There has been a lot of talk of the Madrid exchange forging links with another group, but analysts do not see a pressing need for Madrid to throw in its lot with Euronext, for instance. For the moment, volumes are healthy, the stock exchange is making good money and liquidity is not inferior to any other market in Europe.

The exchange is certainly liquid enough to take on any large new listings that may emerge from the ongoing corporate consolidation process. In fact, in the financial sector Spain was Europe’s pioneer in domestic consolidation, with the two top banks, BBVA and Santander, now in the EU’s top 10.

The process is not expected to end there, and advisory and financing opportunities are expected to arise in a secondary wave of mergers, perhaps involving institutions like Banco Zaragozano and Banco Sabadell, which are €1bn to €2bn banks, or even the larger Banco Popular Español.

Taking into account the market as a whole, there has been an unprecedented level of M&A activity in Spain in the past year. “We had Telefónica bidding for O2, the leveraged buy-out of [Spanish travel firm] Amadeus, the sale of [Spanish mobile phone operator] Amena, the Gas Natural bid for [Spanish energy firm] Endesa, Ferrovial bidding for BAA, [Spanish constructor] Sacyr buying into [French constructor] Eiffage and [Spanish highways operator] Cintra closing large toll road transactions in the US. Spanish companies have been incredibly busy and acquisitive,” says Mr Sánchez-Asiaín.

Global partnerships

The global investment banks have taken the lion’s share of the M&A advisory business in Spain, as BBVA and Santander have built up their business primarily on the back of retail banking.

A case in point is the biggest takeover battle now under way in Spain, Gas Natural’s €22.6bn hostile bid for Endesa, Spain’s top power company. Both sides have brought in the global big hitters, with UBS, Goldman Sachs and Lazard working for Gas Natural, and Merrill Lynch, Deutsche Bank, JPMorgan, Lehman Brothers, BNP Paribas and Citigroup advising Endesa.

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