Telefonica’s German IPO to Raise as Much as $2.2 Billion

Telefonica SA (TEF) may raise as much as 1.68 billion euros ($2.2 billion) by selling almost a quarter of its German unit in an initial public offering, part of the former Spanish phone monopoly’s effort to reduce debt.

Telefonica is offering as many as 258.8 million shares of Telefonica Deutschland Holding AG at 5.25 euros to 6.50 euros each, according to a statement from the Madrid-based company today. The IPO values the German business at as much as 7.3 billion euros.

Chief Executive Officer Cesar Alierta is selling assets, including Telefonica’s German and Latin American businesses, as he seeks to avert a further debt-rating cut. With more than 58 billion euros of net debt, Telefonica is Europe’s most indebted phone operator. Standard & Poor’s said last week it may reduce Telefonica’s BBB rating, the second-lowest investment grade, citing the company’s exposure to Spain’s sovereign risks.

The IPO will be “an attractive transaction and will help it gain more financial flexibility” if Telefonica gets more than 6 euros a share, Andres Bolumburu, an analyst at Banco de Sabadell in Madrid, said in a phone interview.

Telefonica gained 2.3 percent to 10.40 euros at 2 p.m. Madrid time, valuing the company at 47.4 billion euros. The shares had lost 24 percent this year through yesterday, compared with a 10 percent drop by the Spain’s IBEX 35 (IBEX) index.

Earnings Growth

The share sale will start Oct. 17 and end Oct. 29, with trading debut in Frankfurt on Oct. 30, Telefonica said. The parent will sell 225 million shares, with an option for an additional 33.75 million shares to meet strong demand, bringing the IPO to as much as 23.17 percent of the German unit.

The division, which sells services under the O2 brand, had 18.8 million mobile-phone customers at the end of June and it vies with Royal KPN NV’s E-Plus for the position of the third- largest wireless company in Germany, where Vodafone Group Plc (VOD) and Deutsche Telekom AG (DTE) are the leaders.

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.

“We expect to be able to show good year-on-year growth in many metrics, including continued growth in post-paid customers,” Rene Schuster, the unit’s CEO, said in the release. “Our wireless service revenues will continue to increase, although at a lower rate than in the previous quarters.”

Higher Valuation

Telefonica Deutschland has a valuation of 5.5 times to 6.5 estimated 2012 earnings before interest, taxes, depreciation and amortization based on the price range announced today, according to Bolumburu, who had estimated 7.7 times earnings. The average enterprise value for European phone companies is 5.7 times 2012 Ebitda, data compiled by Bloomberg show.

“Even with a higher valuation, Telefonica Deutschland’s IPO is very attractive for investors because it’s a German asset, with little debt, and growth expectations, and it also offers good dividends,” Bolumburu said.

Telefonica Deutschland plans to pay about 500 million euros in cash dividends from 2012 earnings. Telefonica forecasts the dividend will increase in coming years.

The unit’s revenue may climb by 3 percent annually between 2012 and 2015 as the mobile-phone business will offset weaker growth from fixed-line and cable, according to documents seen by Bloomberg News last week. Operating income before depreciation and amortization may increase 5 percent annually in the period, the documents show.

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

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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