On May 15th, 2017 Atlantia has announced its intention to acquire its Spanish competitor, Abertis.

Atlantia, Italian toll operator whose main asset is Autostrade per l’Italia, the largest concessionaire on the Italian highway network, is a holding company belonging to the Benetton family. Under the management of its CEO, Giovanni Castellucci, former partner at the Boston Consulting Group and manager at Barilla, the company has produced revenues for more than €4 billion and generated a net income of €1.12 billion in 2016. Its assets are strongly exposed to country risk, and an acquisition would be a way to enter new markets and diversify this exposure.

Abertis, headquartered in Barcelona and listed in Madrid, is a leading toll operator as well. Present in 13 countries, with a net profit of €897 million in 2017, a 13% increase from 2016, has appeared as an attractive target for Atlantia’s needs: the new conglomerate, in fact, would be in charge of the management of more than 14,000 km of highways and present in 19 countries.

The Italian company, advised by Mediobanca, Santander and Credit Suisse, has proposed a cash-offer, financed by Bnl-Bnp Paribas, Credit Suisse, Intesa San Paolo and Unicredit[1] valuing the Abertis at €16.50 per share and making up a €16.3 billion deal.

Alternatively, Atlantia has also offered stocks with the aim of making the offer attractive Criteria,  unlisted investment bank holding of the Caixa foundation and majority shareholder in Abertis with a 22.3 percent stake, with important investments in the Industrial and the Real Estate sector.
The Italian company would offer unquoted, locked-in stocks, at a fixed conversion rate of 0.697 Atlantia’s share per Abertis share[2], for up to the 23.2 percent of the total offer. This would value the Spanish operator at €17.34 per share; considering the latest trading price at €16.38[3], it represents a generous upside for the shareholders with a premium of around 6%.

This share-swap offer is not appealing for all of Abertis’ stakeholders. Instead, it is a strategic move to win the favor of Criteria, a strategic investor with long-term objectives: in facts, not only the holding keeps its current claims on dividends, projected to increase, but also acquires the right to appoint up to three directors in the Atlantia’s Board, whose size therefore increases from 15 to 18 members[4].

Should this scenario concretize, Edizione, the investment vehicle of the Benetton Family, would suffer a 5 percent dilution in Atlantia, with its stake diminishing from 30 to 25 percent, while Criteria would earn a 15 percent stake. Castellucci has stressed that the combined groups’ strongly performing Latin American assets would be transferred to Abertis, which would maintain its headquarters in Barcelona and would keep trading in Madrid[5].

According to the Spanish Financial Authority, the CNMV, on October 19th Abertis should have formally responded to Atlantia’s offer. Therefore, the bid carried forward by Hochtief, a German leading construction company operating worldwide, with important assets in the US and Australia and, controlled by the Spanish ACS[6], has been a surprise. Hochtief is offering €18.76 per share in cash, attributing to the target a value of €18,6 billion. Alternatively, Abertis investors may opt for a stock-swap option, the conversion rate being 0.1281 per newly issued Hochtief share. Should the Spanish constructor accept this offer, it would add more than 8000 km to the construction business of the German company and ACS, opening up the possibility to extend their operations in Brazil. Advised by J.P. Morgan, Lazard and Key Capital Partners, ACS and Hochtief are now tempting the investors with the promise of high dividends – the combined entity, whose stocks are intended to be traded in Frankfurt, is expected to generate revenues for €24.8 billion and has announced a retention ratio of 10 percent, meaning that roughly 90 percent of its profits would be paid out. Instead, some of the Abertis’ assets would be sold, among which shares in Cellnex Telecom SA and Hispasat SA.

The results of the takeover would be a decrease of ACS’s share in Hochtief, from 72 to less than 50 percent. This would cancel the leverage of the €12 billion net debt, contracted by its investment vehicle, to fund the cash payment, and would leave the company with a stronger position in the resulting entity8.

While Catellucci is considering raising its offer, that could be raised up to €19 per share according to some analysts5, and entering a bidding war, it also has to face a strong opposition by the Spanish government, which is concerned about the loss of the strategic assets owned by Abertis, and wants to prevent the company from falling under foreign ownership. In addition, in case of approval of the second offer by the CNMV, the Spanish Financial Authority, the government may still appeal to the administrative tribunal and cause severe delays in the execution process. The Hochtief offer, that would bring Abertis under the ownership and control of the ACS’ president, Florentino Perez, has encountered a much lower opposition, as the strategic assets owned by Abertis would remain under Spanish ownership. These governmental activities are not unusual: for example, in July 2017 the Macron government had decided to block the offer of Fincantieri and nationalize the building sites in Saint-Nazaire, considered of strategic importance for France, given the unique know-how of the employees, as reported by the French government’s spokesman Castaner[7]. Nevertheless, it is worth noting that such practices seriously harm free market competition and should be limited. Indeed, the issue of governmental interference in public utility companies has been long debated: a recurrent, and sometimes a bit abused, practice is the so-called Golden Share, which allows governments to acquire shares of capital and to appoint members in the Board of Directors of strategic companies and consequently to have a high influence on the decisions taken. This privilege has been, in some cases, sanctioned by the European Court of Justice as dangerous for the markets’ competitive functioning.

Financial markets have responded to the bids’ announcements. While Atlantia lost 1.2 percent, Abertis has been traded at a premium on the bid of the Italian company. The bullish trend has been followed also by ACS and Hochtief, which have gained 5.6 and 1 percent, respectively.[8]

In the end, Abertis seems to be the company benefiting the least from the deal: in fact, it is already well-diversified in terms of EBITDA sources. Additionally, the deal with ACS may be dangerous for Abertis’ creditors in terms of the exposure to the cash-flow volatility of the bidder.
Instead, Atlantia, whose main assets are located in the home market, could diversify its country risk away penetrating in Latin America. Furthermore, despite the poor synergies, it could benefit from an appealingly low acquisition premium embedded in its first offer and, in addition, may increase its cash-flows by building up scale. However, despite the higher acquisition premium of the eventual second offer these benefits would decrease, the Italian group would still enjoy substantial advantages.

With the recent approval of the second offer by the Spanish government, declared at the end of January, the two bidders are now free to compete. In the next 15 days the two companies will have to improve their bids, according to the Cnmv regulation, and then will submit their final offers.

What it is going to happen is still uncertain, but it is possible to see some general drivers in the wave of recent European deals. Low cost of financing, need of consolidation, low opportunities for organic growth are all factors that make M&A extremely attractive for European top players willing to compete in a global field. Just think about the deals between Johnson&Johnson and Actelion, Essilor and Luxottica, Mead Johnson Nutrition and Reckitt Benckiser, Toshiba and Consortium and Vodafone and Idea cellular. These are all examples of the cross-border trend of M&A in Europe, where external growth tends to be preferred more and more to internal expansion[9].

 

Author: Giacomo-Luigi Rossi

Notes:

[1] Source: Reuters

[2] The conversion rate indicates the number of Atlantia shares that can be exchanged with 1 Abertis share

[3] Abertis’ share price on May 15th, 2017. Source: Yahoo Finance

[4] Source: Il Fatto Quotidiano

[5] Source: Financial Times

[6] Actividades de Construccion y Servicios SA – Spanish company whose President is Florentino Perez. ACS is headquartered in Madrid

[7] Source: Il Sole 24 Ore

[8] Source: Bloomberg

[9] Source: Factset

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