Telefonica Grapples With Colombian Government on Funds

Telefonica SA (TEF) is meeting resistance from its co-investor, the Colombian government, on a plan to raise money in the Andean country, the phone company’s top Latin American executive said.

Telefonica needs more cash in Colombia to acquire radio-frequency licenses for faster wireless services, reduce the pension liabilities it has inherited and remain competitive, Santiago Fernandez Valbuena said in an interview. While the Madrid-based company is contemplating ways to raise the funds, including a rights offering of the local unit, the government is reluctant to dilute its 30 percent stake, he said.

“More capital is something that this company needs or else it won’t be able to compete,” Fernandez Valbuena said yesterday at Bloomberg’s Sao Paulo office. “We have not even decided which way to go. It depends crucially on what the government wants to accept as a process, and that’s difficult.”

Telefonica is struggling to compete in Colombia against billionaire Carlos Slim’s America Movil SAB, which leads Latin America’s fourth-largest economy with 62 percent of mobile-phone subscribers. Telefonica also needs to cut a $1.5 billion pension-fund deficit that has to be paid off from the company’s earnings, he said.

Photographer: Angel Navarrete/Bloomberg

A Telefonica logo sits on display outside the headquarters of Telefonica SA in Madrid. Close

A Telefonica logo sits on display outside the headquarters of Telefonica SA in Madrid.

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Photographer: Angel Navarrete/Bloomberg

A Telefonica logo sits on display outside the headquarters of Telefonica SA in Madrid.

After an $85 billion acquisition spree over a decade increased debt and triggered rating cuts, Telefonica Chief Executive Officer Cesar Alierta last year began selling assets. The company said last month it was in talks with Colombian government officials to assess different options to capitalize the unit after halting an initial public offering for all of its Latin American assets.

‘Interesting Proposition’

Colombia plans to hold an auction for faster 4G wireless service on June 26, with payments due about three months later, according to a schedule on the government’s website. The plan is “an interesting proposition -- it’s likely to be a good investment but if you don’t have the cash, you’re out,” Fernandez Valbuena said.

Colombian Deputy Finance Minister Andres Restrepo said he had no response to Fernandez Valbuena’s comments. Finance Minister Mauricio Cardenas was traveling and couldn’t be reached for comment.

Telefonica is seeking to raise “substantial” funds to participate in the auction of 4G radio spectrum, Fernandez Valbuena said, adding the company doesn’t have a specific amount in mind. A deal will still take months to be completed, he added.

Unit Merger

Last year, the Spanish phone carrier merged its Colombian units -- wholly owned wireless division Telefonica Moviles Colombia and fixed-line venture Colombia Telecomunicaciones, which was 48 percent state owned -- to cut $1.7 billion of debt. That deal left Telefonica holding 70 percent of the combined company and Colombia the remainder, with the state stake possibly increasing by as much as 3 percentage points in 2015.

Telefonica shares were little changed at 10.20 euros at the close in Madrid, valuing the company at 46.4 billion euros ($61.9 billion). The benchmark IBEX 35 index gained 0.4 percent.

The pension fund is also hamstringing Telefonica in Colombia by keeping its leverage far too high, at about five times earnings, Fernandez Valbuena said. That ratio should be closer to three times, and the company needs two or three years to reduce the size of the fund, he said.

Mexico, Peru

“We have to bring it down,” he said. “The last thing we need is for them to be able to say, ’Oh, these guys are broke,’ which we are sometimes depending on the configuration of yields and things.”

While Colombia represents less than 3 percent of Telefonica’s revenue, the company is counting on markets in Spanish-speaking Latin America for expansion as growth slows in Brazil and European markets struggle to recover. While Colombian revenue rose 13 percent last year to 1.77 billion euros, it would have climbed 1.6 percent leaving out currency changes, trailing growth in markets including Brazil, Chile and Peru.

In Mexico, where Telefonica’s market share is also dwarfed by America Movil’s 70 percent of mobile-phone customers, Telefonica is getting help from a new law that will help boost competition, Fernandez Valbuena said.

Law Change

“It’s a major step forward into the 21st century, which is where Mexico belongs,” he said. The law should boost revenue for all smaller competitors in the country, he said. While the law, signed yesterday by President Enrique Pena Nieto, allows foreign companies to own landline networks in Mexico for the first time, Telefonica is keeping its focus on mobile phones, Fernandez Valbuena said.

“We don’t think it is such a great business today,” he said. “It’s not high in our plans to become active in the landline market in Mexico.”

While Telefonica already offers home-phone services through a 49 percent stake in Grupo de Telecomunicaciones Mexicanas SA, it uses a wireless technology to do so and doesn’t provide the high-speed Internet and television its competitors can through their landlines.

“The only market where you’re at a disadvantage if you don’t have a landline is the corporate market, which is nice, and nice to have,” Fernandez Valbuena said. “But you don’t have to have a national network to serve and to cater to the corporate market.”

Shelved IPO

Telefonica shelved plans earlier this year to carry out an IPO for the company’s Latin American division mainly because of valuation, Fernandez Valbuena said.

“A lot of the legal and tax work have been done, and we just put it in the freezer so we can take it out if necessary in the future,” he said. He ruled out selling more shares in other stable, fast-growing markets in the region including Chile and Peru.

In Venezuela, Telefonica plans to boost spending to avoid sitting on cash that may lose a third of its value as speculation mounts that the government may devalue the bolivar for a second time this year, a person familiar with the matter said last week.

“The only exchange rate that worries me is the Venezuelan bolivar because that’s the one that’s fully out of mind,” Fernandez Valbuena said.

Other currencies in the region may also pose a risk to Telefonica’s earnings, Barclays Plc analysts said in a June 6 note. The weakness of the Brazilian real in the second quarter will hurt results for Telefonica, Telecom Italia SpA (TIT) and Portugal Telecom SGPS SA, according to the note.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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