Telefonica Germany Completes Europe’s Biggest IPO of 2012

Investors betting on a high-yield telecommunications stock in a market so far sheltered from Europe’s debt crisis -- and a potential wireless network deal -- helped Telefonica SA (TEF)’s German unit complete the largest initial public offering in Europe this year.

Telefonica Deutschland Holding AG (O2D) raised 1.45 billion euros ($1.87 billion) in the IPO, pricing the shares at the top of a narrowed range. The German unit priced 258.8 million shares at 5.60 euros each, compared with an original range of 5.25 euros to 6.50 euros. The stock climbed as much as 2.9 percent to 5.76 euros on the Frankfurt exchange today.

Russian wireless carrier OAO Megafon postponed marketing its IPO this month amid a global slowdown in the equity markets. Telefonica, which has net debt of more than 58 billion euros, is considering sharing its mobile phone network in Germany with Royal KPN NV’s local E-Plus division to lower costs, Telefonica Deutschland told investors on a call about the IPO last week.

“Telefonica Deutschland’s dividend yield is almost 8 percent, which is slightly above the rest of the industry in Europe,” according to Francisco Salvador, a Madrid-based strategist at FGA/MG Valores. “That, combined with more earnings growth potential compared to its peers,” may be the primary reasons why Telefonica has successfully carried out the IPO, he said.

Shares of Madrid-based Telefonica dropped 1.3 percent to 10.07 euros yesterday. They have dropped 25 percent this year, compared with a 10 percent decline in the benchmark IBEX 35 index. The Germany unit’s IPO is the biggest in that country since engine-maker Tognum AG raised 1.8 billion euros in 2007.

Low Price

“Telefonica has sought to secure the transaction at a low price in order to make it more attractive to investors, as it really needs to raise the cash,” said Adrian Zunzunegui, a Madrid-based analyst at Credit Agricole Cheuvreux.

Telefonica’s deteriorating cash flow and lower earnings before interest, taxes, depreciation and amortization will continue even after the IPO, Zunzunegui said. The company is Europe’s most indebted phone operator.

“When people were looking at a potential coming together of Telefonica Deutschland and E-Plus, there was some significant analysis of potential network synergies,” Rachel Empey, chief financial officer of Telefonica Deutschland, told investors on a conference call last week. “Quite a lot of those synergies might be available through network sharing.”

E-Plus

A hypothetical merger of Telefonica Deutschland and E-Plus could generate synergies worth about 4 billion euros for the companies, according to a document prepared by one of the banks managing the IPO and obtained by Bloomberg News. KPN said last year that such a deal may generate 3 billion euros of synergies.

Telefonica Deutschland vies with E-Plus for the position of the third-largest wireless company in Germany, where Vodafone Group Plc and Deutsche Telekom AG are the leaders.

Moody’s Investors Service has given Telefonica a long-term debt rating of Baa2, the second-lowest investment grade, with a negative outlook. Standard & Poor’s said this month that it may reduce Telefonica’s BBB rating, the equivalent of Moody’s, citing the company’s exposure to Spain’s sovereign-debt risks.

“I just don’t see the equity story after the deal, unless Telefonica achieves a network-sharing agreement with KPN,” Peter Braendle, who helps manage about $55 billion at the Zurich-based Swisscanto Asset Management, said in a phone interview. Braendle said he hadn’t subscribed to any shares in the IPO.

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

To contact the reporters on this story: Manuel Baigorri in Madrid at Mbaigorri@bloomberg.net; Ruth David in London at rdavid9@bloomberg.net; Aaron Kirchfeld in London at akirchfeld@bloomberg.net

To contact the editor responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net;

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