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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.