Telefonica Weighs Asset Sales to Cut Debt in Strategy Shift

Telefonica SA (TEF), Europe’s largest phone company by market value, may sell assets that “underperform” to reduce debt and regain investors trust after sales in Spain slumped and growth in Brazil slowed.

Speaking at an industry conference in Barcelona, Finance Chief Angel Vila ruled out selling Telefonica’s operations in Germany, Mexico and the Czech Republic, or its 9.7 percent stake in China Unicom (Hong Kong) Ltd. The Madrid-based company said as recently as Nov. 3 that it’s not considering asset transactions.

Telefonica is assessing its businesses to find non-core or underperforming assets that can be divested, Vila, 47, said yesterday at the conference organized by Morgan Stanley. “No one thing will have a multi-billion impact. It’s going to be an addition of several smaller efforts.”

Chief Executive Officer Cesar Alierta is slashing the Spanish workforce, halting major mergers and acquisitions and trimming debt to stem a 19 percent slump in the stock this year. As Spain’s high unemployment rate prompted consumers to cancel subscriptions or switch to rivals’ cheaper offers, Alierta is increasingly relying on economic growth in Latin America, which accounts for 47 percent of sales.

“The main risks we are seeing in Telefonica are its high leverage and tough existing competition,” Marta Gomez, a Madrid-based analyst at Banesto Bolsa, wrote in a note today, cutting her share-price estimate by 13 percent to 18.33 euros.

Non-core Assets

Telefonica fell as much as 0.9 percent and was down 5 cents, or 0.4 percent, at 13.74 euros as of 9:53 a.m. in Madrid. Spain’s largest phone company has a market value of 62.7 billion euros ($84.5 billion).

Latin American assets remain vital to the company, investors said. In Spain, Telefonica holds a 22 percent stake in digital television provider DTS. Other Telefonica holdings include call-center Atento Inversiones & Teleservicios, a 13 percent stake in satellite company Hispasat and a 5.4 percent stake in Zon Multimedia SGPS SA, Portugal’s biggest cable-TV provider.

Telefonica shelved an initial public offering for Atento in June because of insufficient investor demand.

Along with Mediobanca SpA, Intesa Sanpaolo SpA and Assicurazioni Generali SpA, Telefonica indirectly controls about 22.4 percent of Italy’s former phone monopoly, Telecom Italia SpA (TIT), through holding company Telco SpA.

“Atento would be the number one asset up for sale but who’s going to be interested?” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valores.

Dividend Target

“Ireland or Venezuela wouldn’t make much sense either,” Salvador said. “And they would now even sell Spain if they could as they try to portray itself as a Latin American telecoms company.”

Last week, Telefonica reiterated its full-year financial and dividend forecasts, including sales growth of 1 percent to 4 percent over three years from an adjusted base of 63.1 billion euros in 2010. The company aims to lower its debt to between 2 and 2.5 times operating income before depreciation and amortization.

Triple B

The operator would reconsider its dividend policy only if its debt rating, cut to BBB+ by Standard & Poor’s in August, leaves the triple B category, Vila said, adding that he is confident the company won’t face any more downgrades.

“We would not move beyond this BBB class territory unless there were unimaginable pressures that would put us beyond that,” he said. “If that was going to be the case we would have to react.”

Telefonica said in April that it plans to pay a 2012 dividend of at least 1.75 euros per share. The stock has a dividend yield of about 11 percent, one of the highest among European peers.

“The market is already betting on a dividend cut somewhat,” FGA/MG’s Salvador said. “Telefonica’s dividend policy is way too aggressive.”

To contact the reporters on this story: Cornelius Rahn in Barcelona via crahn2@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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