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2013-03-12 10:33:12
In the rubble, signs of hope
Mar 9th 2013 | MADRID |From the print edition
Life in the afternoon
THERE are two ways to look at Spain s economy. One is to see it as a landscape
blasted by the triple shock of the property crash, the financial crisis and the
travails of the euro zone. In this Spain banks are in ruins, the recession
drags on and the unemployment rate tops 25%. House prices are still far below
what they were in 2007. Reyal Urbis, a big property company, went bust last
month.
But anyone surveying the wreckage will notice that parts of corporate Spain are
not only still standing but gleaming and growing. Unit-labour costs have fallen
and the labour market has become less rigid, making companies more competitive.
Exports have revived. Private-equity funds are sniffing around Madrid for
bargains. These are hopeful signs for the euro zone s fourth-largest economy.
But the cheeriest companies are those that do much of their business outside
it.
For a struggling middleweight economy Spain has a large number of big
international businesses. These include two global retail banks, Santander and
BBVA, Repsol, an oil refiner, and Ferrovial, which has a share of London s
Heathrow airport. Telef nica is Europe s biggest phone company. Inditex owns
Zara, a fashion label coveted by mall-prowling millennials in 86 countries.
This multinational bent is in part a lucky legacy of Spain s relatively late
entry into the European Union (in 1986), which channelled cash into
infrastructure, and thus into construction companies such as Ferrovial and ACS.
Many acquired a taste for the wider world by dabbling in former Spanish
colonies in Latin America, where they were familiar and largely welcome
investors. Some, it is true, helped inflate the Spanish bubble and suffered
when it burst. But they share a knack for offsetting the pain in Spain with
profits from abroad.
To see the results, head to the suburbs of Madrid, where sprawling campus-style
complexes have appeared to house companies that have outgrown their downtown
headquarters. One is practically a new town with bomb-proof data centres and
offices for some 6,000 employees built by Santander at Boadilla, some 15 km
west of central Madrid.
Global change
Santander suffered the worst year in its 156-year history in 2012, when it had
to make provisions of 18.8 billion ($24.2 billion) for bad loans, largely to
the Spanish property sector. The general perception is that only the local
savings banks, now rapidly consolidating, suffered in the country s property
bust. In fact, Santander and BBVA had their own domestic woes.
Santander can work its way out of its plight because it has become a successful
global bank. Less than 30 years ago it was Spain s sixth-biggest retail bank.
Today it is the fourth-biggest in the euro zone by assets and number 17
worldwide, with a market share of 10-15% in ten core countries, including not
just Latin America s biggest economies but also America, Britain and Germany.
It could absorb the Spanish hit thanks to global profits last year of 23.6
billion, four-fifths from retail banking and more than half from emerging
markets such as Brazil and Mexico.
Another complex north-east of Madrid houses 12,000 employees of Telef nica,
which started out as a virtual monopoly in Spain but now sprawls across Europe
and Latin America. It is Spain s third-biggest company by market capitalisation
after Inditex and Santander. It created 5,000 Spanish jobs (directly and
indirectly) in the past year as it expanded fibre-optic networks and
repatriated call centres from South America, where costs had risen.
Telef nica was hurt by the financial markets loss of confidence in Spain,
which pushed up financing costs. It had expanded aggressively, notably by
buying O2, a British mobile-phone operator, in 2006. That left it with a debt
pile equal to 2.6 times its operating income; its share price halved under the
burden.
European revenues fell by 6.5% last year, but this was offset by growth of 5.5%
in Latin America, which now accounts for about half of total revenues; Spain
itself is only a quarter of the company s business now. Last year it looked as
though Telef nica would be forced to sell up to 15% of its Latin American
business to raise finance, but the pressure eased in January when it floated a
bond issue of 1.5 billion, which was heavily oversubscribed, largely by German
and American investors.
Repsol, too, has escaped its home market, though not without drama and
setbacks. Born during Franco s dictatorship, Repsol was mocked as the oil
company with no oil, being merely a refiner and retailer in its captive home
market. After Spain liberalised it bought most of Argentina s YPF, which had
its own reserves. That fell apart after YPF found huge reserves of shale oil
and gas. Argentina s erratic government expropriated Repsol s majority stake
last year.
While it pursues Argentina through the courts for the $10 billion it says it is
owed, Repsol consoles itself that it has found with partners such as BG large
reserves of deepwater oil off Brazil and in the Gulf of Mexico. Antonio Brufau,
the chief executive, newly ensconced in a glitzy corporate campus behind Madrid
s Atocha railway station, is meanwhile returning Repsol to its Spanish roots
by building a new refinery in Cartagena on the south-east coast. Refining
margins are slim, but Repsol benefits from a 40% share of its home market.
Perhaps the most nimble Spanish giant is Ferrovial, a construction and services
company, which also runs airports and toll roads. Although 60% of its business
is outside Spain, it is not a multinational, insists its boss, I igo Meir s.
Ferrovial undertakes large and complex projects in just a few countries where
the rewards justify the risks. Thus four-fifths of foreign revenues and profits
come from Britain, North America and Poland. Ferrovial shuns most emerging
markets as too risky.
Apart from Heathrow (in which it has cut its stake to a third), Ferrovial
specialises in big construction projects such as London s Crossrail and the new
Route 460 toll highway in Virginia. Ferrovial s second leg is providing
municipal services such as road maintenance and rubbish collection.
Paradoxically, says Mr Meir s, government austerity programmes have increased
demand because private firms can do such jobs more cheaply. On February 21st
Ferrovial announced it would buy Enterprise, a British provider of municipal
services, for 385m ($608m).
Another company seeking salvation abroad is ACS, Spain s biggest construction
firm by revenues. It is chaired by Florentino Perez, who as president of Real
Madrid thinks nothing of borrowing to splash out for football stars like
Cristiano Ronaldo. Encouraged by cheap finance before the euro crisis and
comforted by cashflow from its Latin American operations, ACS ran up debts of
more than 9 billion trying (and failing) to gain control of Iberdrola, a
Spanish energy utility. It has since sold part of its stake at a loss to reduce
debt.
Now it is trying to acquire full control of Hochtief, the world s tenth-biggest
construction firm. It amassed a controlling stake in the German company without
paying a takeover premium (to the fury of German investors) and now
consolidates its figures. In 2012 Hochtief accounted for 84% of ACS s 38.4
billion in revenues. ACS plans to hold on to the best bits of the German firm
and sell off pieces to cut its own debt pile.
This makes Zara faster
Inditex, Spain s most successful exporter, runs its empire from the lush
coastland of Galicia where it rains 300 days a year. Its short supply chain
allows it to be as flexible as its customers are fickle. Fabric made in Spain
is sent to Portugal, Morocco and Turkey to be sewn into garments, which are
then shipped to outlets from New York to Beijing. Inditex can tailor its
production to match demand and restock its shops with new frocks every two
weeks. Growth of international and online sales compensates for sluggishness in
Spain, says Inditex s chief executive, Pablo Isla.
While these giants seek their fortunes in the wider world, foreign interest in
Spain is reviving. Renault, Nissan and Ford have all announced plans to invest
in car production, encouraged by reforms that let firms undercut national wage
agreements. For the past 20 years Europe s carmakers have looked to eastern
Europe for cheap labour. But Spain is loosening its labour laws while eastern
wages are rising. So Spain is now back in fashion for car assembly helped by a
thriving auto-parts sector.
A handful of multinationals cannot drag Spain out of its troubles. That will
take stability in public and private finances and policies to help small and
medium-sized enterprises, which are still cut off from credit. Ferrovial, Telef
nica, Repsol and the others are building up, but they are still surrounded by
rubble.