After 'fibercos', the new financial engineering coming to telecoms is called 'RANco'.

In recent days, two news stories have shaken the Spanish telecommunications sector. The first was the entry of GIC, the Singapore sovereign wealth fund—a giant with over $800 billion in assets—into the capital of Surf , the wholesale fiber optic operator (known as fiberco in industry jargon) created by Masorange and Vodafone Spain .

'Surf', the gateway to other transactions

The transaction has closed with a debt-inclusive valuation ( enterprise value or EV) of approximately €6.9 billion. The acquisition, which is now only pending authorization from the Spanish government, expected in late October or early November, unlocks many subsequent processes. The main one is the debt agreement reached with a syndicate of banks to refinance a large portion of Masorange 's debt and provide Surf with €4.7 billion in leverage. This debt agreement, in turn, allows for significant returns for the two main shareholders: Masorange, which will achieve €3.2 billion net, and Vodafone Spain, which will receive €1.4 billion, amounts that will serve both to reduce their debt. It also facilitates the sale of the 50% stake in Masorange held by the funds KKR, Providence, and Cinven .

The second relevant piece of information is that AXA Investment Management, the French investment management firm, is in advanced negotiations with Telefónica and Vodafone Spain to acquire a stake of approximately 30% in Fiberpass, another fiber co created by the two telecoms. This transaction, in which Telefónica holds and will retain the majority, is valued at approximately €1.5 billion, but is more delayed than Surf, although it is expected to close after the summer. It will also serve to further reduce Vodafone Spain's debt.

In this way, two of the main corporate transactions related to telecommunications infrastructure in our country have been put on track.

More foreign money in critical networks

From a strategic perspective, this represents the entry of foreign venture capital funds or similar into the control of critical infrastructure, such as the fiber networks of the three main operators in the sector. This is nothing to the sector's ecosystem that is not already accustomed to. Telefónica's own shareholding is primarily held by foreign institutional investors, although the state-owned Sepi, Criteria, and BBVA jointly control 25%. Furthermore, there are other companies that also own critical networks—such as the main fiber backbone networks—that have powerful foreign shareholders. This is the case with Reintel (49% owned by KKR) and Lyntia Networks , wholly controlled by Swiss Life, Morrison, and AXA . The same is true of Onivia , owner of the third-largest FTTH fiber network in the country, and Masorange and Vodafone , the second and third-largest Spanish telecommunications companies, almost entirely controlled by foreign capital.

From a financial engineering perspective, the two fibercos are cash cows that their developers will milk through various channels to obtain substantial resources. Furthermore, from an operational perspective, they represent a rationalization of the market, concentrating infrastructure and making them serve a greater number of customers, in other words, crystallizing synergies, which makes them more profitable and, therefore, more sustainable.

'RANco', the second phase

Following these transactions, it's not surprising to consider the second phase of this type of financial engineering for the Spanish market, in this case for mobile networks instead of fixed ones. These new companies, which the sector has begun to call RANco , an acronym for RAN (Radio Access Network) company, are—like fiberco companies—vehicles designed by their promoters to crystallize synergies and obtain resources by parking debt in them. This will always occur as long as none of the shareholders exercise control in RANco companies, but rather co-control, which allows for the miracle of the debt incurred not being consolidated on the balance sheets of the parent telecommunications companies.

To achieve this, they are first provided with resources via debt so they can purchase the mobile networks from their shareholders. They are then further indebted, with this money distributed as a dividend to the shareholders/promoters. Finally, a stake is sold to a financial investor based on the guaranteed long-term revenues—typically 30 years—since the telecoms commit to using the RANco to provide services to their mobile customers.

The Zegona-Vantage relationship

Furthermore, an important circumstance is currently taking place in the Spanish mobile sector. Vodafone Spain can abandon most of the towers on which its mobile network is installed—and which belong to the tower company Vantage Towers —as of 2028 without penalty. This is possible because when the sale of Vodafone Spain to Zegona was negotiated, the executives of the parent company Vodafone Group did not bother to lock Vodafone Spain in as a long-term customer of Vantage , so the 2028 exit window remains in effect. When Spain was part of the Vodafone Group, which also owns Vantage, contractual fragility was not an issue. But with Vodafone Spain in the hands of Zegona, Zegona's loyalty to Vantage simply does not exist.

This information is vital because tower operators' contracts with telecom companies are usually well-secured and long-term, and breaking them costs a lot of money due to penalty clauses, which often significantly reduce synergies. But the absence of this restriction makes it easier for Vodafone to consider creating a single mobile network with a partner, without the penalties for abandoning its towers ruining the expected synergies.

A mobile network is very expensive to maintain. You have to pay the tower operator that houses your radio equipment and antennas; the electricity and fiber optic connections to connect it to the network; security; operation and maintenance with human resources deployed throughout the country; and the periodic need for equipment upgrades. Therefore, the more "full" the network is with customers and traffic, the more profitable the network's operation becomes. It's easy to imagine how Masorange and Vodafone Spain 's costs would improve if, instead of each paying for their own independent mobile network, they had a single network that served Masorange 's 25.8 million mobile lines simultaneously with Vodafone's 12.5 million lines.

The existence of 'Jumping'

Since the savings are so evident, the former Orange and Vodafone had already taken a decisive step down this path in Spain with the creation, in April 2019, of Jumping , a network-sharing agreement for medium-sized and small towns—all those with fewer than 175,000 inhabitants—where the network is less profitable. Instead of bearing the costs alone, the two telecoms divided Spain, with one half providing service to the other with a symmetrical roaming agreement. The pact affects approximately 15,000 sites, of which each telecom contributes half. And it gives an idea of their great ambition, considering that their networks each have around 20,000 nodes.

But Jumping is a technical sharing agreement, not a company. It doesn't have a legal entity to which it can borrow, nor do it own the networks, nor can it bring in a financial partner. And all of this is what the RANco aims to remedy. Therefore, once the processes to create the two fibercos are finalized at the end of the year, 2026 could be the year in which the RANco companies arrive.

Observers are predicting the creation of two RANco networks by Vodafone: one with Masorange and one with Telefónica . Obviously, Masorange would prefer Vodafone to create a single RANco network to serve all towns, small and large. This would result in much greater synergies and savings. The idea would be to extend Jumping beyond cities with a population of 175,000 and extend it to larger cities, in addition to converting the agreement into a corporate entity.

Such a RANco would have enormous cost advantages, as it would add up to approximately 38 million mobile lines (25.8 million + 12.5 million). In contrast, the network around Movistar would only have its 16 million plus Digi's 6.5 million, with which it shares a network. But Digi has already announced that it will build its own network—albeit closely linked to Movistar's—with 10,000 of its own nodes, which will significantly reduce the traffic carried on Telefónica's network.

For this reason, and in search of balance so that no one feels too disadvantaged, it is likely that two RANco networks would be chosen: one from Vodafone with Masorange for smaller towns and another from Vodafone with Movistar for larger cities.

Impact on the Vodafone takeover bid

But the creation of the RANCo would make Telefónica's acquisition of Vodafone impossible , as it would prevent the buyer from achieving many of the synergies that make sense and justify the transaction. To create the Masorange-Vodafone RANco —and to sell a stake to a financial partner— Zegona 's subsidiary would have to commit to ensuring that its customers would use the wholesale firm for three decades. This would prevent Telefónica, in the event of acquiring Vodafone, from shutting down Vodafone's network and switching all its customers to its mobile network.

Much to Telefónica 's chagrin, the majority of Vodafone 's fiber customers are already "committed" to staying with Surf for 30 years. Therefore, in a scenario where two RANco companies were created, the purchase of Vodafone would barely provide any additional network synergies to Telefónica . In fact, with the RANco with Vodafone , it would have already achieved a good part of these network synergies without needing to acquire its British rival. There are always other synergies, such as labor (although layoffs are always very unpleasant to manage, especially in the current polarized political situation), commercial (store closures, integration of sales teams), and, of course, the positive impact of the reduction in churn, the theft of customers. Signing up each new customer is very costly (around €400), so reducing customer turnover between different brands directly improves EBITDA. And there is also the so-called market repair, which is the possible increase in prices due to reduced competitive pressure.

Furthermore, it is also unclear whether Masorange would be more advantageous to create the RANco with Vodafone for medium-sized and small cities (or obviously for the entire network, an even more favorable hypothesis) or to take advantage of the remedies and advantages that would undoubtedly accrue to it in the event of a purchase of Vodafone by Telefónica. In the event of consolidation, Masorange is the prime candidate to acquire Vodafone's B2B (Business) business, which Movistar, due to its high market share, would be unable to acquire. And if, in the negotiation for the remedies, in addition to selling the B2B business at a reasonable price, Telefónica were to also agree with Masorange that it would more or less maintain the infrastructure costs that the network sharing zone ( Jumping ) currently entails with Vodafone , the firm led by Meinrad Spenger might possibly have more incentive to support a consolidation than to invest in the RANco . Above all, because with the acquisition of Vodafone, it would also benefit greatly from market repair , as it is one of the two largest operators in the country.

Therefore, analysts agree that RANco would render Telefónica's potential takeover bid for Zegona , the owner of Vodafone , pointless. Or, understanding how relations between telecoms work, and to put it more accurately, RANco would only be considered if, in a few months, Zegona offered clear indications that it does not want to sell Vodafone, or Telefónica made it clear that it does not want to buy it.