Why Are Spanish Stocks Booming?

In a word: construction. Builders are driving growth thanks to a housing boom and EU subsidies. And now they're buying stakes in energy

by Joan Tarzian

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Three decades after it returned to democracy and 20 years after joining the European Union, Spain is veritably oozing prosperity. A sea of construction cranes surrounds major cities. Resorts are hopping. And in vibrant Madrid and Barcelona, swank restaurants and upscale shops are packed with locals and tourists alike.

With economic growth forecast at 3.7% this year—among the fastest rates in Europe and nearly 50% greater than in lumbering France and Germany—it's no wonder Spain's stock market is booming. Madrid's Ibex 35 index is up 30% already this year, by far the strongest growth in Western Europe and one of the top performances in the developed world. In comparison, the S&P 500 index of U.S. stocks has risen less than one-third as much, and the pan-European S&P Europe 350 is up half as much, at 15% for the year.

What's behind the record-breaking surge in Spain? Much of the credit goes to a wave of merger and acquisition activity brought on by consolidation in key sectors. With Spain's strong economic growth, hungry managers are sitting on gobs of cash and looking to snap up assets while the getting is good. The trend is especially clear among corporate giants such as formerly state-owned phone monopoly Telefónica (TEF), which is channeling the profits it reaps from its success in Latin America into big European acquisitions (see BusinessWeek.com, 7/28/06, "Telefónica Gets the Last Laugh").

Where Housing is Hot

"There is an aggressive capitalist spirit running through many Spanish companies," says Robert Tornabell, a banking and finance professor at ESADE Business School in Barcelona. "And it is pushing them to enter Europe and buy."

But perhaps the biggest factor is Spain's booming construction business. Dominated by a handful of giants such as Ferrovial and Grupo Sacyr Vallehermoso, the industry has cashed in on a flood of European Union "cohesion" funds, designed to bring Spain's infrastructure up to par with richer EU members, and a real estate boom that has seen home prices rise more than 200% during the past eight years.

"Spain's financial markets reflect construction's weight in the economy," says Jesus Sanchez Quiñones, general manager of Madrid-based securities firm Renta 4. Construction and real estate make up 10% of the Ibex 35, Quiñones notes. The sector also has contributed more than 10% of gross domestic product growth for the past decade and generated 14% of direct employment for the same period.

That highlights potential risk down the road. The housing boom is starting to slow, and Spain's EU infrastructure funds will start drying up in 2008. That's prompting construction firms to spread their geographical footprint and diversify into new businesses, such as operations management. Ferrovial, for instance, has done both, acquiring construction and facilities businesses in the U.S., Britain, and elsewhere (see BusinessWeek.com, 6/27/06, "Ferrovial: Building a New Future").

Diversifying Into Energy

Back home, Spain's building firms are also making aggressive moves to get into the energy business. Last month, for instance, Madrid-based Acciona demonstrated the construction sector's continued clout and wealth when it snapped up a 10% stake in Spanish utility giant Endesa (ELE). That threw a wrench into the plans of two other energy powerhouses—Germany's E.on (EON) and Spain's Gas Natural—both of which are involved in drawn-out hostile takeover attempts for Endesa. Acciona plans to increase its stake another 9.6%, with the help of Banco Santander (STD), which is holding shares to be transferred to Acciona once regulators give their blessing.

Just days after Acciona's surprise, Spanish construction giant ACS followed suit by requesting permission from regulators to increase its 10% stake in Spanish electrical utility Iberdrola to 24.9%. A year ago, ACS bought a 35.1% stake in another of the country's utilities, Union Fenosa. Not to be left out, Spanish construction heavyweight Sacyr Vallehermoso recently acquired 9.24% of the oil and gas company Repsol (REP) and says it wants to increase its stake to 20%.

Relative to their counterparts elsewhere in Europe, Spain's construction firms "are much more aggressive," says ESADE's Tornabell. No question, they've contributed mightily to Spain's growth and Madrid's surging bourse. Now the only question is whether their diversification drive will be enough to keep Spanish stocks hot.

Tarzian is a correspondent for BusinessWeek in Madrid.