The appeal of Spain on the global stage
In recent years, there has been a shift in the infrastructure corporate landscape with Spanish infrastructure groups becoming a dominant force in large-scale global projects, second only to China in size and power. Spanish groups now boast an impressive global portfolio with Ferrovial (the majority owner of the UK’s Heathrow airport), ACS (which owns German construction group Hochtief), and Talgo (a mid-sized Spanish rolling stock company that has run the Mecca to Medina high-speed train project alongside a consortium of 12 Spanish groups). Other Spanish-led projects include the Panama Canal expansion, Crossrail in London, the Sydney Light Rail as well as metros in Riyadh, Doha and Lima.
This is all despite the domestic economy still feeling the effects of a housing crisis and deep recession from 2009 to 2013, which cost millions in jobs and left Spain deep in debt. It was in fact the collapsing economy that forced the Spanish infrastructure market onto an international stage where they have since thrived.
During a 21-year period, government agencies spent €81bn on infrastructure, with only a short drop in funding during the 2007 crisis. Those who survived despite the loss in government funding are now a stronger force than before as they are less leveraged, leaner and increasingly international in nature. Therefore, though the government spend was as a whole, varying degrees of successful, the sheer size of investment allowed infrastructure groups in Spain to grow rapidly, expanding not only domestically but on a global scale, now able to compete on large projects.
Spain now boasts the largest and most experienced global corporate infrastructure groups in the world that are looking to recycle capital, deleverage balance sheets and / or sell concessions they have built. This creates opportunities for international infrastructure funds not only from Europe, but from the USA and Australia to have access to, and secure, high quality infrastructure assets, to be acquired and sold by these groups.
Subsidiaries driving activity
The UN’s sustainable development goals (SDGs) are being increasingly recognised globally by the development community, the private sector and broader society. Spain is a key contributor to this global market, being one of the leaders in renewable energy space – completing 23 deals in the space in the last five years.
Five year infrastructure M&A activity: by sector
This is demonstrative of governments all over the world continuing to align their policies with increasingly important corporate social responsibility, and a particular focus on renewable energy. In Spain, the demand for renewables is not only being met by the many new companies appearing in the sector, but also by the investors who see the opportunities that lie there, such as:
- Stable returns, usually in the mid to high single digits
- An investment period that is often ten or more years
- Even as the market enters a post-subsidy environment, it may give insurance and pension fund managers the opportunity to lock in real, long-term yields
In turning their attention towards renewable energy in Spain, these investors will encounter a market that has matured rapidly over the past 15 years. Growing technological efficiency, coupled with increasingly sophisticated approaches to asset management and financial risk mitigation, have made wind and solar portfolios an attractive investment proposition. This has been evidenced by substantial M&A activity in Spain’s post-subsidy market recently. The sophistication of many illiquid renewable energy strategies and their ESG credentials are attracting increased attention from the large institutional investor universe in Spain. Disappearing bond yields are creating a pull into renewables. This looks likely to continue to be a wise move for investment in Spain in coming years with cheap debt also fuelling the build-out of renewables and further increasing deal flow.
Powering future M&A
Despite renewables being an increasingly popular choice for investors, it is worth noting that there is a large number of high yield deals taking place in the power and gas sector, too. Of the ten biggest infrastructure deals that have taken place in Spain in the last five years, 50% of these were in gas distribution. With the second largest Spanish infrastructure transaction of the last five years being GIP’s acquisition of a 20% share in Naturgy for €3.8bn in 2016.
Where many predicted a dip in activity in 2018/2019 for the energy and gas sector, available capital and continued consolidation of businesses has fuelled an uptick in M&A activity in the market. Where oil and gas contributes to 20% of total deal value in Europe, it contributes to 27% in Spain, with increased interest from foreign investors only likely to increase that contribution in coming years.
International investors driving domestic deal flow
As well as Spanish infrastructure groups playing a large part in the global market, Spanish-based infrastructure projects are also of interest to European investors. Transport, in particular toll roads, continues to be a huge business in Spain – 23 of the 77 infrastructure deals completed in Spain in the last five years have been in the transport sector. Accounting for 42% of the €67bn total deal value, not only is this sub-sector one of the largest in Spain, it’s also the market with the highest transaction value per deal. The 2018 Abertis / Atlantia deal and OHL Concesiones / IFM deal alone accounted for a combined deal value of €19bn.
The source of capital being put into toll roads is also of interest. Government bonds are no longer the go-to investment and attention has switched to some unusual alternatives. As government debt now results in bonds that no longer provide a safe and steady flow of return, toll roads are instead being backed by insurance and pension funds. With the short-term nature of these investments, the profit from these funds is then being recycled to fund further expansion of toll roads, adding to the industry’s value and further expanding the infrastructure market in Spain.
As deal volumes and values continue to rise, infrastructure remains a crucial business in Spain for both European and Spanish investors. Industry operators and investors should therefore:
- Capitalise on Spanish groups’ expertise in large projects
- Look for quick and secure wins in toll roads and other forms of transport
- Grow portfolios with long-term, high yield renewable companies
Spanish infrastructure contacts
Joaquín Gonzalo, Spain
T: +91 524 11 24
Raúl J. Julián, Spain
T: +34 91 5241 128
Ilya Bonhomme-Gomez, UK
T: +44 20 7856 0956