Telefonica Plans German IPO as Investors Lose $60 Billion

Telefonica CEO Cesar Alierta
Cesar Alierta, chairman and chief executive officer of Telefonica SA. Photographer: Jonathan Fickies/Bloomberg

Telefonica SA, whose market value has slumped by $60 billion in 1 1/2 years, plans to sell shares in its German and Latin American phone units, raising cash to restore debt ratings threatened by Spain’s financial crisis.

Telefonica’s board yesterday approved a proposal to seek an initial public offering for O2 Germany, and to explore possible listings for its Latin American assets. The Madrid-based company will speed up the sale of non-core businesses and cut the cash portion of its 2012 dividend by 69 percent.

Chief Executive Officer Cesar Alierta, who spent the past decade making acquisitions in Latin America, Europe and China, is now turning to some of Telefonica’s most valuable divisions for cash. Standard & Poor’s cut the company’s rating last week to the lowest level since it started ranking the debt in 1996. Telefonica this week ceded its position as Spain’s biggest company by market value to clothing retailer Inditex SA.

“Germany is Telefonica’s crown jewel in Europe so this could be a positive move,” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valores. “No doubt investors will be more willing to pay a premium for assets in Germany or Latin America rather than the U.K. or Spain.”

Telefonica jumped as much as 3.4 percent and was up 2.8 percent at 9.10 euros as of 9:17 a.m. in Madrid. The stock had declined 34 percent this year through yesterday, the worst performance in the 19-company Bloomberg Europe Telecommunication Services Index, which was down 12 percent.

Market Value

Its market value of 40.7 billion euros ($50.5 billion) as of yesterday has shrunk by 49 billion euros since November 2010 and compares with as much as 110 billion euros reached in 2007. It is also less than Telefonica’s net debt of 57.1 billion euros at the end of March.

Alierta, who spent about $85 billion on acquisitions since taking over in 2000, is struggling to stem customer defections in Spain to discounters. By relying on proceeds from reorganizing and selling smaller assets such as the Colombian unit, satellite company Hispasat SA and Portugal’s Zon Multimedia SGPS SA, the CEO hasn’t gone far enough to protect its debt rating, said Roger Appleyard, head of global credit research at RBC Capital Markets in London.

“Telefonica needs to speed up the sale of assets,” Appleyard said. “It’s a balance. They need to keep investing but cannot be aggressive anymore.”

O2 Valuation

Alierta bought mobile-phone operator O2 Plc for $31.5 billion in 2006 to add wireless units in the U.K., Ireland and Germany in his biggest acquisition. Germany is now Telefonica’s second-largest market in Europe with 25 million customers, compared with 44.3 million in Spain. The U.K. follows with 23.3 million customers.

Macquarie Securities values the German business alone at about 7 billion euros, while Espirito Santo Investment Bank said the unit may be worth 8 billion euros to 9 billion euros. A Telefonica spokesman declined to comment on valuation or a timetable for the IPO.

Billionaire Carlos Slim’s America Movil SAB yesterday began a 2.6 billion-euro offer to boost its stake in Dutch phone company Royal KPN NV. KPN controls E-Plus, which vies for the No. 3 position with O2 in Germany.

A listing of O2 Germany may be a prelude to consolidation, as is KPN’s indication that it would respond to America Movil’s tender offer shortly, Jefferies analyst Ulrich Rathe said in a note today. Still, German consolidation faces significant regulatory hurdles, he wrote.

Latin America

In Latin America, Alierta expanded Telefonica in the past decade in Argentina, Peru, Brazil as well as Mexico, going head-to-head with Slim. In Brazil, the only Latin American economy larger than Mexico, Telefonica maintains its leading 30 percent market share while Slim has slipped to third place behind Telecom Italia SpA’s TIM unit.

“Telefonica’s decision comes way too late as it wants to sell assets at an all-time low when it could have done it much earlier,” said Robin Bienenstock, an analyst at Sanford C. Bernstein in London. “You now have corporate uncertainty on top of the whole euro-crisis.”

Bernstein estimates the Latin American business, excluding “unattractive” Argentina and Venezuela, is worth 47 billion euros.

‘Crucial Moment’

Telefonica is considering carving out assets for individual Latin American countries instead of an IPO for the regional business, said a person with knowledge of the matter, asking not to be identified because the discussions are confidential.

Alierta bought Brazil’s Vivo Participacoes SA in 2010 for 7.5 billion euros. In Europe, Telefonica also owns a 10.5 percent indirect stake in Telecom Italia, worth 1.3 billion euros at yesterday close. It holds a 9.6 percent stake in China Unicom Hong Kong Ltd. valued at $3.2 billion.

“This is a crucial moment for Telefonica’s management to start making decisions,” said Juan Fuente, who helps manage about $9 billion including Telefonica shares at Bankinter Gestion in Madrid. “There’s increasing pressure from unhappy investors as the shares continue to drop sharply.”

Telefonica, which cut its 2012 dividend forecast in December, said yesterday it plans to pay 40 cents of the 1.50 euro-a-share dividend in cash, compared with 1.30 euros previously. The remainder will be paid via share buybacks and a scrip dividend, or payment in stock.

Debt Ratio

The operator still aims to reach a net debt ratio of less than 2.35 times operating income before depreciation and amortization this year. The ratio was about 2.5 times last year.

“Their cash squeeze is beginning to compromise their ability operationally and to invest in their businesses,” said Guy Peddy, an analyst at Macquarie Securities in London.

Starting next month, Telefonica will face even more challenges to defend its Spanish market share as customers will be able to change operators more quickly while keeping their phone number. First-quarter Oibda in Spain slumped 14 percent, while earnings in Latin America surpassed Europe for the first time in the period.

Telefonica’s mobile-phone market share in Spain fell to 38.6 percent in March from 39.6 percent in the previous month. Telefonica was the only company losing wireless clients in March, ceding 337,700 customers, the Spanish phone regulator said today.

The company said in a presentation today it sees benefits from last year’s layoffs of about 250 million euros in 2012, while profitability for the group will improve in the second half.

Alierta, who holds a law degree from the University of Zaragoza and an MBA from Columbia University, has been a board member at Telefonica since 1997 and chairman since 2000. The 67-year-old told shareholders this month that he was optimistic the stock will rebound and “our main goal is to survive.”


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