Telefonica Said to Use Part of $3 Billion Stuck in Venezuela

Telefonica SA (TEF) plans to increase spending in Venezuela this year to hedge against a further decline in the value of cash it can’t repatriate to Spain, according to a company presentation seen by Bloomberg News.

Telefonica, which expanded in Venezuela with the 2004 takeover of BellSouth Corp.’s Latin American wireless business, accumulated dividends valued at 18.8 billion bolivars ($3 billion) over the past seven years, according to the internal documents dated April 9. The dividends have lost about $1.4 billion in value, taking into account the February devaluation of the bolivar to 6.3 per dollar from 4.3.

Telefonica will increase the Venezuelan unit’s 2013 capital spending budget by 78 percent to 3.9 billion bolivars, according to the presentation. The amount excludes an additional 600 million bolivars earmarked for buying high-speed wireless licenses. Telefonica is the second-largest mobile carrier in the country after state-owned CA Nacional Telefonos de Venezuela. The unit is Madrid-based Telefonica’s most profitable in Latin America after Brazil.

“The fact that foreign companies cannot repatriate cash in dividends to their countries has become a huge headache for them,” said Asdrubal Oliveros, a research director at Ecoanalitica in Caracas. Foreign companies in Venezuela will probably face increasing losses this year because of inflation and more foreign-exchange adjustments, he said.

Photographer: Angel Navarrete/Bloomberg

Telefonica SA plans to increase the Venezuelan unit’s 2013 capital spending budget by 78 percent to 3.9 billion bolivars, according to the presentation. Close

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Photographer: Angel Navarrete/Bloomberg

Telefonica SA plans to increase the Venezuelan unit’s 2013 capital spending budget by 78 percent to 3.9 billion bolivars, according to the presentation.

Losing Value

Overseas companies may hold about $12 billion in dividends in Venezuela that they can’t repatriate, according to an estimate by Oliveros. The devaluation has hurt international companies from Procter & Gamble Co. to Merck & Co.

Santiago Fernandez Valbuena, chief executive officer of Telefonica Latin America, was briefed by local executives last week in Caracas on the Venezuela unit’s spending plans and earnings projections, said a person familiar with the matter, asking not to be identified because the meeting was private.

Telefonica is weighing the next round of assets from Europe to China as it seeks to cut net debt by 4.3 billion euros ($5.6 billion) this year. The company is preparing to sell shares of its Colombian division after halting an initial public offering for all of its Latin American assets.

A Telefonica spokesman declined to comment on spending plans in Venezuela.

Chavez Successor

Credit-default swaps insuring Telefonica’s debt for five years climbed as much as 4.6 percent to 210 basis points, the most in more than two weeks, signaling a deterioration in creditworthiness. The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Telefonica shares dropped 0.4 percent to 10.66 euros at 3:17 p.m. in Madrid, valuing the company at 48.5 billion euros.

Nicolas Maduro, ex-President Hugo Chavez’s handpicked successor, won elections by a narrower margin than polls predicted. He beat Henrique Capriles on a campaign to deepen his mentor’s 14-year socialist push that has included the nationalization of more than 1,000 companies or their assets and imposing currency controls.

Limited access to foreign currencies will be among the considerations that may weigh on the Venezuelan unit’s earnings this year, according to Telefonica’s presentation. The division predicts 2013 operating income before depreciation and amortization of 9.54 billion bolivars, an increase of 22 percent from last year, while sales will climb 37 percent to 23.6 billion bolivars, the presentation showed.

Inflation Risks

Telefonica, Spain’s biggest phone company, saw its earnings last year hurt by a 417 million-euro loss from its position in bolivars. Venezuela accounted for 11 percent of Telefonica’s revenue from Latin America last year and about 5.5 percent of the company’s total sales, data compiled by Bloomberg showed.

Other risks include slower economic growth, “strong inflation and bigger regulatory restrictions” as well as availability and price of smartphones in the market, according Telefonica’s documents. The division has a target for 4.2 million smartphone customers at the end of 2013, according to the presentation. It had 3.4 million users at the end of the first quarter, 155,000 fewer than it had predicted, partly because of the currency devaluation, the documents showed.

At the end of the first quarter, Telefonica Venezolana CA, as the unit which operates under the Movistar brand is known, had a 32.6 percent market share, according to the presentation.

CA Nacional Telefonos de Venezuela’s mobile service Movilnet had a 52.1 percent share, while Digitel GSM ranked third with a 15.3 percent share, the presentation showed.

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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