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Telefonica Said to Plan Sale of 20% Stake in O2 Germany

Telefonica SA, which is exploring share sales for its German and Latin American assets, is considering an initial public offering of a 20 percent stake in the O2 Germany unit, said three people familiar with the matter.

Spain’s biggest phone company wants to raise as much as 2 billion euros ($2.5 billion) from the sale, said the people, who asked not to be identified because the discussions are private and the targets may change. Telefonica has an internal goal to cut its debt by a range of 6 billion euros to 8 billion euros this year, said one of the people.

Telefonica is seeking to accelerate repayment of its 57.1 billion euros in net debt after Standard & Poor’s lowered the Madrid-based company’s rating last month. While an IPO for O2 Germany is the preferred option, a merger with E-Plus, Royal KPN NV’s German mobile-phone unit, remains an alternative, people familiar with the matter said.

“It’s hard to predict a timeframe on the IPO as all depends on market conditions,” said Bruno Lippens, who manages about $9 billion in a telecommunications fund at Pictet Asset Management in Geneva, including Telefonica and KPN shares. “I assume they want to list O2 at a fairly high multiple, making it overly dependent in future growth and hence very vulnerable to disappointments.”

Smallest Operator

A Telefonica representative declined to comment.

Telefonica’s German unit had wireless-service revenue of 758 million euros last quarter, making it the smallest of the country’s four mobile-network operators.

Telefonica fell 0.9 percent to 9.30 euros in Madrid, valuing the company at 42.8 billion euros. KPN slipped 0.2 percent on the Amsterdam exchange.

As Europe’s debt crisis deters demand for first-time stock sales, companies including Graff Diamonds Corp. and billionaire Eike Batista’s AUX gold business have shelved IPO plans. Facebook Inc., the social-networking company that raised $16 billion last month, has dropped 29 percent since its IPO.

A year ago, Telefonica suspended IPO plans for its call-center business, Atento Inversiones & Teleservicios SAU. Atento remains a very difficult asset to sell, said one of the people.

KPN, trying to fend off an unsolicited 2.6 billion-euro offer for a stake from Carlos Slim’s America Movil SAB, last week announced an expansion of its strategy review to include the E-Plus business. The Dutch phone company and Telefonica are evaluating a variety of options, including a combination of O2 Germany and E-Plus and then selling a stake in an entity as part of an IPO, people familiar with the matter have said.

Revenue Share

O2 Germany and E-Plus would have a combined mobile-phone client base of 41.7 million, which would leapfrog Vodafone Group Plc’s 36.5 million and Deutsche Telekom AG’s 35.1 million. Based on wireless-service revenue in the first three months of this year, a combined E-Plus and O2 remains smaller, with about 1.53 billion euros, compared with Vodafone’s 1.7 billion euros and 1.66 billion euros for T-Mobile.

E-Plus is under pressure after it became the only one of Germany’s four operators to fail to secure wireless spectrum in the coveted 800-megahertz band.

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