TheChek News Flow

Red Electrica de Espana (REE), [BME:REE] is likely to create a new telecoms division, combining its fiber-optics business and Hispasat, before offering a stake in the new entity for sale, two sources familiar with the situation and a sector banker said.

The Spanish electricity network provider is closing the acquisition of satellites company Hispasat. Local press said last month that it could sell a stake in its fiber business Reintel or list it, following this deal. It could also seek a co-investor for Hispasat, it was reported.

Although bankers are pitching a range of solutions, the creation of a new telecoms division to hold both businesses and a subsequent deal at the divisional level makes more sense than transactions involving the individual businesses, the first source said. No sale process is currently taking place, this source added.

Reintel by itself would be much less interesting for investors than REE’s overall telecoms business, said the second source. An operational merger of fiber and satellites would create value, the banker said.

The company is buying Hispasat for EUR 949m. It is the eighth-largest satellites company in the world, and the fourth in Latin America, with an EBITDA of 161m.

REE has said that it sees Hispasat as being complementary to its dark (or unused) fiber optic network. It buys fiber networks and sells access to last-mile providers, it said.

The idea behind looking for a partner for the telecoms business makes a lot of sense, said the second source. REE needs to invest significant sums of money, has high debt and is to face tougher regulations, this source said. REE needs to think about its capital structure, this source added.

REE said it intends to keep its net financial debt / EBITDA ratio around 4x up to 2022. The ratio was 3x at the end of 2018, before closing the Hispasat deal. Its net financial debt was EUR 4.68bn, while its EBITDA for the year was EUR 161m.

On 8 April, Fitch Ratings downgraded REE to A- from A. The agency said that the company’s EUR 6bn investment plan to 2022, including the Hispasat deal, is not compatible with its current capital structure.

Infrastructure funds would be very interested in taking a minority stake in REE’s telecoms unit, the second source said. The Spanish government, which counts Hispasat as a strategically important business, would be unlikely to throw up any regulatory hurdles, this source said.

At the same time, an IPO of the telecoms division could also make sense, the second source, an ECM banker and a buysider said. Network businesses are in demand with investors, said the ECM banker and the buysider.

REE’s telecoms business would be a growth story, focusing on communication by air and sea, comparable to SES SA [FRA: SES] of Luxembourg, the buysider added.

A spokesperson for REE declined to comment.