Telefonica Germany Said to Seek Valuation Topping Peers
Telefonica SA (TEF), the Spanish phone company divesting assets to avoid a debt-rating cut, is seeking to sell shares of its German unit at a higher valuation than the industry average, according to people familiar with the matter.
As investor meetings kicked off this month, Madrid-based Telefonica’s advisers are testing demand for shares at a preliminary valuation of 6.5 to 7 times estimated 2013 earnings before interest, taxes, depreciation and amortization at the high end of the range, the people said, asking not to be identified because the gatherings are private. At the low end, the multiples are 5.5 to 6 times Ebitda, they said.
Chief Executive Officer Cesar Alierta plans to sell shares of Telefonica Deutschland Holding AG (0614012D) to help pare a debt pile of more than 58 billion euros ($75 billion). The valuation he’s seeking compares with an average enterprise value for European peers of 5.8 times 2013 Ebitda, and 5.4 times for Telefonica, data compiled by Bloomberg show.
“I don’t see why I should pay to please Telefonica management by paying more than the shares are worth,” said Andrea Puccini, who manages 460 million euros at Fideuram Asset Management in Dublin. The German unit is valued at slightly more than 5 times Ebitda, he said.
Telefonica will probably sell additional shares in the future after the initial public offering, potentially weighing on the stock, Puccini said. Investors may value the business higher if they believe in a potential combination with Royal KPN NV (KPN)’s E-Plus unit and the resulting savings, he said.
Telefonica referred questions about the IPO to the German unit. Albert Fetsch, a spokesman for Munich-based Telefonica Deutschland, declined to comment on the IPO’s valuation.
Alierta is reversing a decade-long expansion strategy and selling some of Telefonica’s most valuable assets to avoid a reduction in its BBB rating by Standard & Poor’s. Alierta also abandoned his penchant for high shareholder payouts after halting dividends and canceling share buybacks to save an estimated 10.2 billion euros.
The company hasn’t confirmed what percentage of the German business it plans to sell or the amount it wants to raise. It intends to keep a majority of the unit.
The IPO could happen as early as this month and Telefonica may sell a 20 percent stake for as much as 1.5 billion euros, valuing the unit at 7.5 billion euros, people familiar with the matter have said. The division had net debt of about 1.1 billion euros as of Sept. 30.
Talanx AG, Germany’s third-biggest insurer, has risen about 6.6 percent since the stock began trading on Oct. 2.
Telefonica Deutschland, which sells wireless services under the O2 brand and whose shares will trade in Frankfurt, plans to pay about 500 million euros in cash dividends from 2012 earnings. Telefonica forecasts the dividend will increase in coming years.
“I’m bearish on telecoms, and if they go too aggressive they risk no one will buy,” said Quirien Lemey, an investment analyst at Brussels-based Petercam SA, which manages assets worth as much as 13 billion euros. “That said, Telefonica Germany is one of the better assets in Europe, and I think they can ask for more than would generally be accepted” for phone companies in the region.
Investors considering taking part in the IPO have another alternative. OAO MegaFon, Russia’s second-largest mobile-phone operator, may start an IPO in London as early as this week to raise $3 billion, people familiar with the plans said.
Telefonica Deutschland’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. Telefonica Germany, which also offers fixed-line phone and Internet services, had 18.8 million mobile-phone customers as of June.
Telefonica said the unit plans to boost its mobile market share and widen its margins through “efficiency improvements.” The second-quarter Oibda margin was 25.7 percent.
While carriers such as Vodafone and Telenor ASA (TEL) are expanding outside the stagnating European market, Telefonica Deutschland relying on one market may hurt its valuation, said Francisco Salvador, a strategist at FGA/MG Valores in Madrid.
“Those European phone companies that offer higher earnings growth, such as Vodafone or Telenor, have a premium valuation,” Salvador said. In a sluggish IPO market, Telefonica Deutschland investors “could ask for a discount of about 15 percent depending on transaction details and market environment.”
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