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Telefonica German Unit to Sell Shares in IPO This Quarter

Telefonica SA (TEF), Spain’s biggest phone company, plans to sell shares in its O2 Germany unit this quarter to help pare a debt pile of more than 58 billion euros ($75 billion).

The company hasn’t confirmed the percentage of the holding to be listed or the amount it plans to raise, though it intends to keep a majority of Telefonica Deutschland Holding AG, the Madrid-based operator said in a statement today. The initial public offering may raise as much as 1.5 billion euros and value the unit at 7.5 billion euros, people familiar with the matter have said.

Faced with falling profit and increased competition in its domestic market, Telefonica is selling assets, including stakes in its German and Latin American units, to help cut debt that ballooned in an acquisition spree. In July, Telefonica scrapped a 1.50 euro-a-share dividend for 2012, and will resume paying half of the amount starting in the last quarter of 2013.

“This is a very significant milestone in the company’s attempts to cut debt, not only because of the amount it can raise but also because it will be key for further asset sales such as its call-center unit Atento and a share sale in Latin America,” Nuno Matias, an analyst at Espirito Santo in Lisbon, said by phone. “We still need to know what percentage of capital Telefonica plans to sell as well as the valuation.”

Telefonica fell 0.2 percent to 10.52 euros at 1:28 p.m. in Madrid, valuing the company at 47.9 billion euros. The stock lost 21 percent this year through yesterday, while the Bloomberg Europe Telecommunication Services Index (BETELES) dropped 3.6 percent.

High Dividends

O2 Germany shares will trade in Frankfurt, Telefonica said. A 1.5 billion-euro IPO would be the biggest in Germany since engine maker Tognum AG (TGM) raised 1.8 billion euros in 2007.

A listing of O2 Germany could happen as early as this month, and Telefonica will start gauging investor interest this week, people familiar with the matter have said. The company said the German unit will pay about 500 million euros in cash dividends next year from 2012 earnings, signaling Telefonica Chief Executive Officer Cesar Alierta plans to use high payouts to attract investors. Telefonica forecasts the dividend will increase in coming years.

‘Growth Story’

With phone companies from the Netherlands to France cutting dividends to preserve cash, Telefonica is betting the payments to shareholders will offset the unit’s small size in Germany, where mobile accounts outnumber people, people familiar with the matter said last week. O2 and Royal KPN NV (KPN)’s E-Plus unit vie for the position of the third-largest wireless company in Germany, where Vodafone Group Plc (VOD) and Deutsche Telekom AG (DTE) are the leaders.

“We are convinced that an IPO will enable us to raise our profile further, and to continue the successful growth story of Telefonica Deutschland in Germany in the long term,” Rene Schuster, chief executive officer of the German business, said in the statement.

UBS AG and JPMorgan Chase & Co. (JPM) are managing the IPO, with help from Bank of America Corp., BNP Paribas SA, Citigroup Inc. and HSBC Holdings Plc.

Telefonica’s German business had first-half net income of 55 million euros, up from 23 million euros a year earlier, the company said today.

Market Share

The German unit’s second-quarter operating income before depreciation and amortization, or Oibda, rose 12 percent to 333 million euros. It had wireless-service revenue of 789 million euros in the period, almost the same as E-Plus. The unit, which also offers fixed-line phone and Internet services, had 18.8 million mobile-phone customers as of June.

The unit expects to increase its mobile market share and its Oibda margins through economies of scale and efficiencies, it said. The second-quarter Oibda margin was 25.7 percent.

While Telefonica’s Germany unit sees next year and 2014 as a crucial period to deploy long-term evolution, or LTE, technology for faster data speeds, capital expenditure isn’t expected to exceed the levels of 2010, when it deployed 3G, it said. Capital expenditure will decline after that, the company said.

“We intend to drive profitable growth and efficiency resulting in enhanced cash flow generation,” Telefonica Deutschland Chief Financial Officer Rachel Empey said in the statement.

To contact the reporter on this story: 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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