(Bloomberg) -- Romanian tycoon Zoltan Teszari, one of the country’s richest people, keeps such a low profile that local newspapers are often forced to use 20-year-old photographs of the multimillionaire.   

Now, a potential deal in Spain has thrust the company that built the reclusive 53-year-old entrepreneur’s fortune into the spotlight.

The Spanish unit of Digi Communications is poised to become one of the biggest winners of the country’s telecommunications consolidation. Digi, which grew from a shop selling phone cards to the Romanian diaspora in the southern European nation into its fifth-largest telecom operator, is favored by European Union regulators — according to documents seen by Bloomberg — to receive a bonanza that will likely turbo-charge its growth in the country.

Digi’s windfall is linked to a planned €18.6 billion ($20.2 billion) merger of Orange SA’s local unit and Masmovil Ibercom SA, Spain’s No. 2 and No. 4 carriers respectively, that would take a major competitor off the market. The EU has previously rejected such combinations, seeking to foster competition that favors consumers. But declining profits at the national carriers and a desperate need to find funds to build out 5G networks may convince regulators to let this one go through as long as the companies promise to sell certain assets to rivals. With Orange and Masmovil expecting to win approval for their deal by year-end, Digi is the EU’s preferred acquirer of the assets and has reached a preliminary accord to buy them, according to people familiar with the matter. 

How the Orange-Masmovil merger unfolds is being closely watched across much of Europe, with its success potentially triggering a wave of consolidation, especially in highly competitive markets like Spain, Italy, France and Denmark. Fewer players may bring improving margins, and could lead to greater funds to European telecom networks and help close an estimated investment gap of €174 billion. In October, Vodafone Group Plc agreed to sell its struggling Spanish unit to Zegona Communications Plc, an investment firm that makes money overhauling challenged businesses. 

“Mergers and other potential acquisitions look set to disrupt the status quo,” said Ahmad Latif Ali, EMEA telecommunications insights lead at IDC, adding that the proposed Orange-Masmovil merger is a litmus test for the Commission’s stance on consolidation. The deal, which could give Digi some key assets is “a unique chance,” and could be “a transformative moment for the company," he said.

Digi, whose business model still mostly depends on renting network connectivity from big operators, is already growing in Romania and Spain. It has broader ambitions for Europe, expanding into Portugal and Belgium next year. It has started building its fixed network in Portugal, and said it’s on track to launch services there in the second quarter of 2024. In Belgium, Digi entered a joint venture with local operator Citymesh last year and recently signed a five-year roaming deal that will ensure mobile services for clients starting in the second half of next year.

“Looking beyond 2023, we are pleased to be advancing with our entry into the Portuguese and Belgian markets, where we aim to replicate our affordable, high quality service model, thereby ensuring our continued growth in the European telecom landscape,” Digi Chief Executive Officer Serghei Bulgac said in the company’s earnings statement last month. 

Although not involved in every twist and turn of operations, Teszari, who owns about 60% of Digi, is the ultimate decision maker for the group and calls the shots on all its big decisions, from its strategy to M&A, company officials say. Teszari, who rarely speaks to the press, declined to comment on his firm’s plans for the future. 

Judo Champion

Still, little could have prepared him for the group’s success so far. Born in 1970 to a family of ethnic Hungarians — a minority in Romania — Teszari first made money as a young judo champion traveling in Europe and bringing products for sale that were hard to find in his Communist home country, like coffee and tobacco. He plowed the proceeds into an ice cream shop in the backyard of a church and then into a company that imported equipment for television firms before finally founding the Internet, cable TV and phone business that preceded Digi.

Until the mid-2000s, Teszari ran the business himself from its base in Romania, with employees saying he was hands-on and omnipresent. A car fan, Teszari is known to have bought himself a red Audi 80 in the 1990s, a rare display of wealth when everybody else in Romania had a Dacia — the only car that was built and available in the country at the time. Little is known about Teszari’s current whereabouts, with the Romanian media speculating that he lives in Hungary or at a residence near the Baile Felix thermal spa resort in Transylvania, in western Romania. 

The entrepreneur has maintained a low profile since he stepped back from the day-to-day operations, handing over the reins to current CEO Bulgac in 2015. 

But before that, in 2008, he had taken his telecom firm to Spain through the acquisition of a controlling stake in a carrier that catered to Romanians in the country. At the time, Spain was in the midst of a spectacular increase in Romanian arrivals, the biggest foreign group in the country, even ahead of Moroccans. Mostly without valid work permits, the newly arrived Romanians often worked as fruit pickers, in construction or the hospitality industry. 

Digi sought to make this community “feel at home,” distributing its services through a network of convenience stores and businesses across Spain that catered to the migrant population, with customer service in Romanian. It has since broadened its reach, providing service more widely to Spanish customers. Digi saw its revenues increase 30% in the third quarter this year and today boasts 6.1 million customers, including 1.5 million who signed up in the last year alone. 

Digi’s stellar ascent, especially in the last decade, hasn’t been without controversies. A day after its shares began trading on May 16, 2017, the company announced that CEO Bulgac was being probed by Romanian anti-corruption prosecutors and charged with money laundering. The same charges were levelled against the company on July 25 that year. Bulgac was later acquitted but the case has dragged on, with a full re-trial by the Bucharest Court of Appeal pending.

In Spain, Digi last year delayed the publication of its 2021 accounts four times after its auditor KPMG said the company had not provided sufficient documentation on the sale of its Hungarian subsidiary to operator 4iG for €625 million, according to El Pais. Digi representatives declined to comment on the delays, but pointed to the auditor’s report that said that 4iG had not “been responsive” to KPMG’s requests for information to enable Digi to claim a profit from discontinued operations. 

None of that seems to have stopped the company’s march. With low leverage levels giving it plenty of space to offer rock-bottom prices, Digi has managed to steal market share in Spain. The company, which currently pays market leader Telefonica SA to use the latter’s 4G and fiber networks, is rolling out its own such networks. It offers a discount of up to 40% to clients on its new networks, with better headline speeds. 

Price War?

A Morgan Stanley report led by analyst Nawar Cristini, published in late June, found that most brands, including Telefonica, Orange and Masmovil, have had to flee the lower end of the market in the last year as Digi pushed prices as low as €15 for a 500 Mbps fiber connection, and a mobile plan that includes 10GB and unlimited calls for €7.

In a harbinger of the price war to come, Eamonn O’Hare, the CEO of Zegona, which is buying Vodafone Spain, told Bloomberg News it would fight Digi “in the trenches” by bolstering its low-cost brand Lowi with 5G and TV offerings. 

“Digi is a distant number four player, it’s got a little market share, it gushes a lot of cash and it may get a little bit more oxygen: No problem,” he said. “You’re a consumer, you go, here’s Digi with 4G and no content and here’s the Lowi brand with TV and 5G and they’re the same price. Which one are you gonna take?”

Orange and Masmovil would prefer to sell their assets — such as access to fiber networks, some fixed-line clients and mobile spectrum licenses — to smaller rival Avatel, an 11-year-old telecom operator that offers services in rural areas, a person familiar with the deal said. But the European Commission has suggested Digi, which has more clients and a broader footprint across Spain, as a buyer, according to documents seen by Bloomberg.

“In the light of the possible Masmovil merger, we would be interested to take part in the remedies,” CEO Bulgac said during the company’s Nov. 14 earnings call, declining to say how the purchases would be financed.

With the bulk of Digi's growth in Spain coming from fixed-line services, the option to buy spectrum from Orange-Masmovil could boost the company’s mobile business, said IDC’s Ali. 

“They could have their own network and look at sharing opportunities across mobile, fixed line and fiber,” he said.

The potential merger has provided a sliver of hope for telcos in a market where they’ve struggled to make a return on investment. But the prospect of an aggressive competitor like Digi strengthened by access to key assets is raising the specter of more losers than winners in the market. Telefonica is among those likely to take a hit since it makes about €350 million a year from giving Digi wholesale access, or about 14% of its equity free-cash-flow, according to Deustche Bank analyst Keval Khiroya.

Orange and Vodafone lost market share last year while Digi won over a million new clients in the period. Digi’s possibilities send shivers down the spines of those who remember the story of Masmovil, which in 2015 benefitted from remedies that helped it become a mobile-operator with its own spectrum, enabling it to compete on par with larger rivals like Vodafone, Orange and Telefonica. Masmovil bought fiber-optic assets that Orange was asked by the Commission to sell in order to buy internet provider Jazztel. The deal enabled Masmovil to offer fiber services to 720,000 households in Spain's largest cities.

Telefonica, Spain's biggest telecom operator, is already bracing for potential trouble. Chief Operating Officer Angel Vila last month said the company had a “contingency plan” and “additional levers” ready to deal with the outcome of the remedies of a potential Orange-Masmovil deal.

As Teszari’s Digi shakes up the Spanish telecoms market, there may be lessons for the rest of Europe. 

“The biggest players in Spain wanted to scale and conquer, and now they're pulling back due to lackluster returns in recent years,” said IDC’s Ali. “That gives an opportunity to existing players and new entrants to gain market share.”

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