Telefonica German IPO Plan Follows Path Filled With Flops

Telefonica German IPO Plan Follows Path Filled With Flops
A Telefonica SA store. Photographer: Angel Navarrete/Bloomberg

Telefonica SA’s plan for an initial public offering of its O2 Germany unit follows a course that has failed to reap rewards for competitors over the past decade.

France Telecom SA, which raised 6.3 billion euros ($7.8 billion) selling shares in its Orange division in 2001, offered to buy them back at a loss two years later. Hutchison Whampoa Ltd. in 2006 pulled a stock sale for its Italian business, while Deutsche Telekom AG had considered listing T-Mobile USA before a botched attempt to sell the unit last year. Belgium’s Mobistar SA and Sonaecom SGPS SA of Portugal, two single-market European operators still listed, are trading below their IPO prices.

Telefonica said this week it will explore share sales for O2 Germany and its Latin American businesses as Spain’s largest phone company speeds up attempts to cut its net debt of more than 57 billion euros. The prospect of owning a minority stake in the No. 3 of four mobile operators in Germany, a market with more handsets than people, has left investors unconvinced.

“It’s going to be a protracted sale and a bit of a long shot,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at London-based FM Capital Partners Ltd. “It’s taken them a long time before taking the initiative. That leaves them little option but to go for their trophy assets in order to monetize anything.”

Valuable Assets

Chief Executive Officer Cesar Alierta, with his company’s net debt greater than its market value, is turning to some of Telefonica’s most valuable assets after Standard & Poor’s last week cut the Madrid-based phone operator’s credit rating to two levels above junk.

The cost of insuring against a failure by Telefonica to pay its debts jumped to a record today, as credit-default swaps on the company rose 13 basis points, or 2.7 percent, to a record 481, according to data compiled by Bloomberg. The price of the contracts climbed 33 percent in May, the biggest monthly increase since November.

Telefonica rose 0.4 percent to 8.97 euros as of 11:13 a.m. in Madrid. That pared the stock’s drop this year to 33 percent to value the company at 41.3 billion euros, compared with Telefonica’s market value of 110 billion euros in 2007.

Boris Boehm, who helps manage 1.1 billion euros including Telefonica shares at Aramea Asset Management in Hamburg, says the IPO plans aren’t helped by the fact that the operator’s need for cash is too obvious.

‘Poker Game’

“If everyone knows that Telefonica needs money out of the IPO, I would say it’s not a wise idea,” he said, adding that he wouldn’t be interested in buying O2 Germany’s stock. “It’s like in a poker game, if everyone knows what your cards are, it’s not a good game to play.”

Alierta, who spent about $85 billion on acquisitions since taking over in 2000, is struggling to stem customer defections to discounters in Spain as the country is mired in a banking crisis. He has so far relied on reorganizing and selling smaller assets such as the Colombian unit, satellite company Hispasat SA and Portugal’s Zon Multimedia SGPS SA, steps that have fallen short of helping the company meet its debt reduction target. S&P’s rating cut, to BBB, further increases the cost of borrowing for the former phone monopoly.

Market Consolidation

A German IPO plan may pave the way for a combination of O2 Germany with local rival E-Plus, owned by Royal KPN NV, said two people familiar with the Spanish company’s thinking, who asked not to be named as the matter is not public.

Billionaire Carlos Slim’s America Movil SAB this week began a 2.6 billion-euro offer to increase its stake in The Hague, Netherlands-based KPN. Telefonica’s finance chief, Angel Vila, told an investor conference in London yesterday that Telefonica has no plan to make a counter bid for KPN, according to two people who attended the meeting, who asked not to be identified because the meeting is private. Telefonica declined to comment.

“To get any sort of premium valuation, you have to be thinking at some point if I buy into this, I’m going to benefit from intra-market consolidation,” said Andrew Hogley, a London-based analyst at Espirito Santo Investment Bank.

KPN said today it will conduct a strategy review of E-Plus. KPN CEO Eelco Blok said as recently as November that a combination of E-Plus and O2 Germany could generate 3 billion euros in synergies, even though Telefonica wasn’t willing to sell.

Consolidation Question

Heinrich Ey, a fund manager at Allianz Global Investors in Frankfurt, which manages about 300 billion euros including Telefonica and Deutsche Telekom shares, said the Spanish company had to “rush and react” after S&P’s cut and Slim’s KPN bid. “The big question down the road is on consolidation,” he said.

O2 Germany and E-Plus compete with the two larger operators Vodafone Group Plc and Deutsche Telekom in Europe’s largest wireless market. O2’s market share of service revenue at about 15 percent was little changed in the last three years.

“What’s the story? There’s no growth story in European mobile,” Espirito Santo’s Hogley said. “Germany on its own becomes a bit peripheral.”

While Germany has been less affected by the region’s debt crisis, growth of its wireless market is also slower because more consumers already own a mobile phone.

German Subscribers

German mobile-phone subscriptions rose 4.8 percent in 2011, compared with growth of 5.6 percent in all of Europe, according to data compiled by Bloomberg Industries. Wireless penetration reached 139 percent in 2011 compared with 130.3 percent for the region.

Telefonica’s German business, its second-largest European market with 25 million subscribers, may be valued at as much as 9 billion euros, according to Citigroup Inc.

By listing a stake in the unit, Telefonica is going against the trend of operators seeking to divest minority holdings in favor of full ownership of assets. Vodafone has sold stakes in France and Poland, while France Telecom has disposed of assets in Switzerland and is exiting Austria.

Telefonica this week also cut the cash portion of its 2012 dividend by 69 percent. Investors in the German unit may themselves demand a payout, said Paul Marsch, an analyst at Berenberg Bank in London.

“Listing the asset like this might solve your problem in terms of giving you increased liquidity at a time of huge uncertainty, but it’s not cost free,” Marsch said. “That begs the question as to management thinking and strategy.”

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