The gain in Spain

The roof terrace outside the ninth-floor office of Cesar Alierta in the middle of Madrid affords views to the distant hills outside the city. But the personal vision of Mr Alierta, boss of Telefónica, Spain's leading multinational and its biggest telephone company, ranges even further. In the past year he assumed 100% ownership of the biggest mobile-phone company in Latin America, Telefónica Moviles, integrating it into Telefónica. In Europe he has also integrated O2, originally BT's mobile-phone offshoot, which Telefonica bought in 2005. In the first nine months of last year his company's net profit was up by 59%.

With 196m customers in Europe and Latin America, Telefónica is now the fifth-largest telecoms company in the world and the leading firm in Europe supplying both fixed and mobile services. Having conquered Latin America and secured its place in wider Europe, Telefónica last year tried for a bigger role in China, aiming for a 25% stake in PCCW, a Hong Kong telecoms company. Faced with local opposition, it had to make do with 8%.

But elsewhere Spain seems to be unstoppable. Its main hunting ground has been Britain, where Spanish companies have spent more than $55 billion in recent years, according to calculations by Thomson Financial, a data provider. The prey have been energy, utility and infrastructure firms. Many Britons now phone, bank, travel by Tube, fly out of an airport, run a tap or flush the toilet courtesy of Spanish enterprise. The first deal was when a Spanish bank, Banco Santander, which at the time was little-known, swooped on Britain's sixth-largest bank, Abbey. The latest deal in the works is the €17.2 billion bid by Iberdrola, a Spanish electricity company, for Scottish Power, a utility that includes nuclear, hydro and wind power in its portfolio.

The highest-profile Spanish deal of all, launched last year, was that of Ferrovial, a construction company, for BAA, the company that owned the three main airports serving London—Heathrow, Gatwick and Stansted—and six others. Having offered £10.3 billion ($20.2 billion), Ferrovial fought off a counterbid and persisted despite the announcement in mid-battle that the British government's competition commission would investigate BAA's monopoly with a view to breaking it up.

These airports are widely seen as a goldmine because price control on user charges is lax and the terminals offer huge opportunities for the development of lucrative retail parks. Spain's Abertis owns three other British airports, Luton, Belfast and Cardiff. Back in 2003 Ferrovial had grabbed an earlier stake in Britain's transport infrastructure when it bought a services and project-management company, Amey, which owns two-thirds of the Tube Lines consortium responsible for running the network (not the trains) on London's Jubilee, Northern and Piccadilly Underground lines.

So why is Spain emerging as such a successful predator? It has done well out of generous European Union aid since it joined the EU in 1986. Its economy has notched up an impressive average annual growth rate of 3.8% over the past ten years when the rest of continental Europe has lagged behind at around 2.1%. Membership of the euro, says Mr Alierta, has also facilitated cross-border deals. And the latest generation of Spanish business leaders has been educated in the ways of Anglo-Saxon capitalism at American universities rather than imbibing vintage mercantilism at some French grande école.

There are two further reasons behind Spain's foreign expansion. One is a special law that allows companies to offset against tax 30% of the goodwill costs of any foreign corporate purchase. Goodwill means the difference between the book value of assets and the actual price paid. This allows Spanish companies to outbid others. The second reason is that Spain's resurgence has been narrowly based on an inflationary boom in property, construction and banking. When that boom busts, the gain in Spain will turn mainly into pain.

Spanish capitalism, for all its new-found foreign elan, is still a clannish affair, with banks holding blocking stakes in companies and firms holding cross-shareholdings in each other, which limits the proportion of shares that float freely. A handful of leading business families—Entrecanales, March, Kaplowski and Perez—call the shots. The intriguing question is whether the new conquistadores have borrowed and paid too much, or whether their new portfolio of (largely) British steady earners will save them from the worst when Spain itself turns sour.

Feb 8th 2007 From The Economist print edition

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