Telefonica Deutschland Rises in Europe’s Biggest 2012 IPO

Telefonica Deutschland Holding AG, the German unit of Spain’s biggest phone company, climbed in its trading debut after completing Europe’s biggest initial public offering this year.

The shares rose 3.6 percent to 5.80 euros in Frankfurt, valuing the Munich-based carrier at 6.5 billion euros ($8.4 billion). The company sold 258.8 million shares at 5.60 euros each, at the top of a range that was narrowed twice and in the lower half of an initial range of 5.25 euros to 6.50 euros.

Telefonica Deutschland, operating in a market so far sheltered from Europe’s debt crisis, is seeking sales growth as more people use mobile devices to surf the Web, watch video clips and send e-mail. The unit plans to pay about 500 million euros in cash dividends from 2012 earnings and has projected increasing payouts in coming years.

“Investors will be looking at how the business generates strong cash flows in coming years in order to deliver the dividends it has promised,” said Heinrich Ey, a fund manager at Allianz Global Investors in Frankfurt, which manages about 300 billion euros.

Telefonica SA (TEF), the Spanish parent with more than 58 billion euros of net debt, is Europe’s most indebted phone company. Chief Executive Officer Cesar Alierta is reversing a decade-long expansion strategy as it rushes to avoid a downgrade of its debt ratings. The Madrid-based company also plans to sell shares of its Latin American unit and divested a $1.4 billion stake in China Unicom (Hong Kong) Ltd. in July.

Tougher Competition

While the majority of shares were allocated to European funds, demand was strong among U.S. investors, according to two people with knowledge of the sale, asking not to be identified as the information isn’t public.

Germany is one of the best markets,” Ey said. “However, competition could raise challenges down the road, especially if a cut on mobile termination rates triggers a price war among the smaller rivals.”

Even as Germany’s economy has held up better than those of Spain and Italy, it is facing a slowdown that may prompt consumers to start looking for lower mobile-phone rates. German unemployment climbed twice as much as economists forecast in October, the Federal Labor Agency said today. The economy may contract in the fourth quarter as slowing global growth and Europe’s debt crisis crimp demand for its exports, the Bundesbank said last week.

IPO Drought

“The European economy is in a much better place than three years ago even if we are not out of the woods yet,” Telefonica Deutschland CEO Rene Schuster told reporters today in Frankfurt. “I don’t think there will be another price war in Germany. What we will see and what we want is the introduction of inexpensive smartphones -- maybe as low as 50 euros.”

Before today, IPOs in Europe, the Middle East and Africa have raised $8.5 billion this year, compared with $37 billion in the same period in 2011, as market volatility caused by Europe’s sovereign debt crisis slowed the pace of sales, according to data compiled by Bloomberg.

Talanx AG (TLX), Germany’s third-biggest insurer, has risen 6.8 percent since the stock began trading on Oct. 2. Dutch cable company Ziggo NV (ZIGGO) has climbed about 38 percent since its March 21 debut.

Telefonica Deutschland’s IPO is the biggest in Germany since engine maker Tognum AG (TGM) raised 1.8 billion euros in 2007, according to Bloomberg data. For the telecommunications industry, it is the largest in Europe since Belgacom SA’s 3.59 billion-euro sale in 2004.

Network Sharing?

Telefonica Deutschland vies with Royal KPN NV (KPN)’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 is considering sharing its network with E-Plus to lower costs after the two businesses abandoned talks for a merger this year.

“The whole sector is talking to each other,” Schuster said today in a speech at the Frankfurt Stock Exchange. “There is nothing at the moment -- we are focused on the IPO, the Christmas business and then we will see next year.”

A hypothetical merger of Telefonica Deutschland and E-Plus could generate savings 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 savings.

Dividend Cuts

The IPO of Telefonica Deutschland, which failed to get the upper end of its price range, shows how challenging times are for stock sales in Europe, Allianz Global Investors’ Ey said.

“The fact that there have been several dividend cuts and profit warnings in the last year or so makes it harder to attract investors, as many of them are already very underweight on the industry as a whole,” he said.

France Telecom SA said last week it will reduce its payout to as low as 80 cents a share as it copes with a more difficult environment than expected. The cut was the second this year for the owner of the Orange brand and marks a drop from a 2011 dividend of 1.40 euros.

In July, Telefonica scrapped a 1.5 euro-a-share dividend for 2012 and said it plans to resume half of the payout toward the end of next year. It also cut a revenue forecast and slashed compensation for top executives including Alierta.

Telefonica Deutschland’s dividend yield is almost 8 percent, slightly above the rest of the industry in Europe, according to Francisco Salvador, a strategist at FGA/MG Valores in Madrid. That, combined with higher earnings-growth potential compared with its peers, may be the main reason why the IPO succeeded, he said.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Joseph de Weck in Berlin at jdeweck@bloomberg.net; Ruth David in London at rdavid9@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.