Even Florentino Perez of Real Madrid Has Spending Limits

(Bloomberg Gadfly) -- Real Madrid president Florentino Perez is looking at how to stop the Benetton family buying Spanish toll-road operator Abertis Infraestructuras SA. He can start a fight. Whether he can bring home a trophy is less clear.

Perez's life outside soccer includes running Actividades de Construccion y Servicios SA, the Spanish construction group whose main asset is a controlling stake in German peer Hochtief AG. ACS said in July it was weighing an offer to rival a 16.3 billion euro ($19.2 billion) bid tabled by Atlantia Spa, an Italian infrastructure group 30-percent owned by the Benettons.

Combining ACS and Abertis would create a company that could both build infrastructure projects and operate them -- like Ferrovial SA and Vinci SA.  Being bigger may perhaps open up more opportunities for Hochtief around the world. But the chief benefit of a deal would be cutting ACS's exposure to the volatility of the construction sector. 

Atlantia's offer comprises 12.5 to 14.7 billion euros in cash, worth 16.50 euros a share, with the balance paid in Atlantia stock. The recent gain in Atlantia's share price means the stock element is currently worth 18.55 euros a share. This part of the transaction would let the lead Abertis shareholder, Criteria Caixa, stay invested.

Analysts expect any counterbid to be made through Hochtief. Suppose it tries to top the cash part of Atlantia's offer with a pitch at 18 euros a share. Remove the Abertis treasury shares from the equation and that would mean finding 12 billion euros of cash. A combined Hochtief-Abertis would -- just -- be able to support additional borrowing on that scale, Berenberg analysts have shown.

The snag is net debt would rise to more than 5 times Ebitda based on 2018 estimates, putting downward pressure on the credit rating. Hochtief would want to make disposals to cut leverage fast. Berenberg sees potential for 4 billion euros of asset sales that would cut leverage to a more manageable 4.6 times. But the counterbid would then risk being criticized as a break-up. 

If Hochtief can't raise this much new debt -- Kepler Cheuvreux thinks 9 billion euros is more realistic -- it will have to tap its shareholders, or partners, for fresh equity.

Meanwhile, Hochtief would have to offer a stake to Caixa of the same value as Atlantia's stock component. Based on Hochtief's current value that would imply issuing shares worth one-third of an enlarged Hochtief-Abertis. Problem one: ACS would be diluted to just below 50 percent, ceding control. Problem two: Caixa might not even want shares in a company exposed to the construction market. 

The core difficulty is clear: Hochtief would need to use more equity and its debt costs would be higher than Atlantia's too, given its construction exposure. Atlantia is borrowing at 1.9 percent, Hochtief's package would probably be more than 3 percent.

The politics are unhelpful too. Maybe Madrid would prefer to keep Barcelona-based Abertis in Spanish hands. However, much of the business is in Catalonia. Tension over the Catalan independence movement muddies the water.

To succeed, Perez needs to pitch an offer so high that Atlantia just walks away for fear of destroying value. But a price where Atlantia would be overpaying would mean Perez was surely overpaying even more. Even for a man whose team bought Cristiano Ronaldo and Gareth Bale, there must be a limit.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.