Telefonica Awakens to Debt Concern With Unicom Stake Sale

Telefonica SA CEO Cesar Alierta
Cesar Alierta, chief executive officer of Telefonica SA. Photographer: Angel Navarrete/Bloomberg

Telefonica SA’s decision to sell half of its stake in China Unicom (Hong Kong) Ltd., paring its seven-year venture into one of the fastest-growing wireless markets, shows the burden of debt on the Spanish operator.

The sale of 1.07 billion China Unicom shares for HK$11 billion ($1.4 billion) will cut Telefonica’s holding in China’s second-largest mobile-phone operator to 5 percent, the companies said yesterday. The HK$10.21-per-share deal values the stake at 22 percent less than its carrying value on Telefonica’s accounts. Madrid-based Telefonica agreed not to sell any further China Unicom shares for 12 months.

Having spent $85 billion on acquisitions since taking over in 2000, Telefonica Chief Executive Officer Cesar Alierta is now under pressure to reduce more than 57 billion euros in net debt. Standard & Poor’s cut the company’s rating last month and in the past two weeks Telefonica has announced plans to slash the cash portion of its dividend and explore initial public offerings for its German and Latin American assets.

“It reflects how the board is finally recognizing the seriousness of the concern of credit markets over Telefonica’s balance sheet,” said Paul Marsch, an analyst at Berenberg Bank in London who advises selling the stock. “This is the right step but you can’t look at this in isolation.”

Spanish Bailout

Telefonica shares dropped 1 percent to 9.68 euros in Madrid. The stock has fallen 28 percent this year, cutting the company’s market value to 44.1 billion euros. China Unicom climbed 6.6 percent to HK$11.06 in Hong Kong trading, the steepest increase since August, 2011.

The sale came as Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros to rescue its banks. Seven months after winning a landslide victory, Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize Spanish banks without external help as the Treasury’s access to capital markets narrowed.

For Telefonica, the sale of the China Unicom shares was also an aboutface. Alierta said in a February interview that he wanted to keep the China Unicom stake “forever.” Telefonica yesterday reiterated its commitment to continue cooperation on roaming, technology and digital opportunities with the Chinese company.

China Mobile

Under yesterday’s agreement, Telefonica will sell the China Unicom shares to the Chinese carrier’s state-owned parent China United Network Communications Group. Pending regulatory approval, the transaction will probably be completed by the end of July, the companies said.

The disposal highlights the difficulties for overseas carriers to expand in China’s telecommunications market beyond holding minority stakes. Vodafone Group Plc sold its 3.2 percent stake in China Mobile Ltd. in 2010 for $6.5 billion, unraveling a decade-long investment in what is now the world’s biggest mobile-phone operator.

Alierta will remain a China Unicom director and Chang Xiaobing, chairman and CEO of China Unicom, will stay on the board of the Spanish company.

“Entering China was Alierta’s personal bet,” said Francisco Salvador, a strategist at FGA/MG Valores. “It just didn’t make any sense for Telefonica to have that stake without being able to increase it further.”

Debt Target

Alierta’s venture in China dates back to June 2005, when Telefonica bought 2.99 percent of China Netcom Group Corp. (Hong Kong) Ltd. for 240 million euros. The stake was raised to 5 percent in September that year, with the total investment reaching 418 million euros. Unicom acquired China Netcom Group Corp. in 2008.

In January 2011, Telefonica agreed to increase its stake in China Unicom to 9.7 percent, and the Chinese company raised its holding in the Spanish operator to 1.37 percent. Each company bought $500 million of shares in the other.

As Alierta now seeks to unwind some of his acquisitions, Telefonica has an internal target to cut its debt by a range of 6 billion euros to 8 billion euros this year, a person familiar with the matter said this month. The company is considering an IPO of a 20 percent stake in the O2 Germany unit, aiming to raise as much as 2 billion euros, people familiar with the matter have said.

The Spanish operator is seeking about 1 billion euros from the disposal of its Atento call-center division, people with knowledge of the matter said last week. Bain Capital Partners LLC is among potential bidders, with binding offers expected by the end of this month, they said.

“Telefonica will have to move faster with the IPO plans in Germany and maybe sell Atento at a lower-than-expected price while also undertaking the IPO in Latin America this year,” Berenberg Bank’s Marsch said.

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