Telefonica Names Alvarez-Pallete as New COO in Revamp

Telefonica SA named Jose Maria Alvarez-Pallete as chief operating officer as part of a second top management reshuffle in a year as Spain’s biggest telephone company struggles to stem a slide in revenue in its home market.

Alvarez-Pallete, who was named head of Telefonica Europe a year ago, now replaces Julio Linares, who had been at the company for more than 40 years, Madrid-based Telefonica said in a statement yesterday. Board member Eva Castillo, a former Merrill Lynch & Co. and Goldman Sachs Group Inc. executive, is replacing Alvarez-Pallete as head of the European business.

The stock has dropped 20 percent since the company, led by Chief Executive Officer Cesar Alierta, announced top executive changes in September 2011. Telefonica is losing customers in debt-stricken Spain and is trying to cut its net debt that amounted to more than 58 billion euros ($76 billion) at the end of June. The company also said Santiago Fernandez Valbuena, the CEO of its business in Latin America, will join the management board while keeping his current position.

“Alierta is keeping all the doors open for his future replacement with the appointment of Valbuena as a board member and Castillo as head of Europe,” Banco de Sabadell analyst Andres Bolumburu said by phone today. “This is a positive move as it brings new blood to Telefonica’s management. Alierta doesn’t want people to get too comfortable with their current roles as the company faces extremely big headwinds.”

Telefonica today dropped 1.4 percent to 11.34 euros in Madrid trading, valuing the company at 51.6 billion euros.

German IPO

Alvarez-Pallete, 48, has a degree in economics from Madrid’s Complutense University and joined Telefonica in February 1999 as a finance executive. In July 2002, he was appointed CEO of Telefonica’s business in Latin America. Linares, 66, will stay on Telefonica’s board, without holding an executive role at the company, Telefonica said.

“Alvarez-Pallete seems to be moving upwards in the hierarchy of Telefonica,” said Nuno Matias, an analyst at Espirito Santo in Lisbon. “The move, however, doesn’t necessarily mean he is going to replace Cesar Alierta as CEO.”

Telefonica is trying to set up an organizational structure “which will be stable over time and ready to compete internationally with guaranteed success in a highly demanding environment,” the company said.

Asset Disposals

Telefonica is moving ahead with plans for an initial public offering of its German unit after adding four banking advisers, people with knowledge of the process said on Sept. 5.

Telefonica is discussing the sale of a 20 percent stake in the O2 division for about 1 billion euros to 1.5 billion euros, the people said at the time. The sale is part of Telefonica’s asset-disposal program to help repay debt and protect its debt ratings.

Castillo, the new head of the company’s European unit, headed Merrill Lynch’s wealth management business in Europe, the Middle East and Africa until December 2009. Before joining Merrill Lynch, Castillo worked for Goldman Sachs in the bank’s international equity markets department.

The company in July suspended dividend payments, cut a revenue forecast and slashed compensation for top executives including Alierta in his most drastic response to Spain’s debt crisis.

Spanish Crisis

Spain, which forecasts an economic contraction of 1.7 percent this year, is in its second recession in three years. The country’s 25 percent unemployment rate is Europe’s highest and Telefonica is struggling to compete with cheaper local competitors such as TeliaSonera AB’s Yoigo unit and Jazztel Plc.

About $42 billion in acquisitions over two decades in Latin America, which culminated in the $10 billion takeover of Brazilian mobile operator Vivo Participacoes SA in 2010, made Telefonica the most acquisitive Spanish company in the region. In 1998, when Telefonica decided to suspend a dividend to finance its expansion in Latin America, the company continued to remunerate investors with bonus shares.

Yet, as debt increases and demand for phone services in Spain shrinks, CEO Alierta has to unravel that strategy.

The phone operator is still studying different scenarios for an IPO in Latin America and the timetable will depend on which one is picked, a person with direct knowledge of the matter said this month. Telefonica is also trying to sell its call-center unit Atento, the person said at the time.

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