Telefonica Said to Lure Germans With Payout Ended in Spain

Updated on
Telefonica Said to Lure Germans With Dividends It Ended in Spain
Telefonica is discussing the sale of a 20 percent stake in the unit for 1 billion euros to 1.5 billion euros, people familiar with the matter have said. Photographer: Angel Navarrete/Bloomberg

Telefonica SA, the Spanish phone company that has halted shareholder payouts to protect its debt ratings, will use high dividends to attract investors to a share sale by its German unit, said three people familiar with the matter.

As banks prepare to gauge interest for O2 Germany’s 1.5 billion-euro ($1.9 billion) initial public offering, Telefonica is considering paying about 500 million euros in dividends next year with a payout ratio of more than 90 percent of the local unit’s net income, said two of the people, asking not to be identified because the plans aren’t public. The stock may start trading in Frankfurt at the end of October, they said.

With phone companies from the Netherlands to France cutting dividends to preserve cash, Madrid-based Telefonica is betting higher payouts will offset O2’s small size in Germany, where mobile accounts outnumber people. O2 Germany’s payout relative to profit would compare with a European average of about 65 percent, according to an estimate by German Garcia, a Madrid-based analyst at Ahorro Corp. Financiera.

“The company needs to offer an attractive dividend,” Garcia said. “The IPO in Germany is crucial for Telefonica if it wants to preserve its credit rating.”

Telefonica will also try to lure investors with the unit’s revenue and market-share growth potential as well as Germany’s safer macroeconomic environment than in Spain, said two of the people.

An official at Telefonica declined to comment on the German IPO plan.

Since Tognum

Telefonica is discussing the sale of a 20 percent stake in the unit for 1 billion euros to 1.5 billion euros, people familiar with the matter have said. At the high end of the range, the IPO would be the biggest in Germany since industrial-engine maker Tognum AG raised 1.8 billion euros in 2007.

Talanx AG, Germany’s third-biggest insurer, last week revived its IPO plan after cutting the amount it aims to raise to about 500 million euros.

Battered by declining profit at its domestic market, Telefonica is selling assets, including stakes in its German and Latin American businesses, to help pare more than 58 billion of euros of debt. In July, Telefonica decided to scrap a 1.50 euro-a-share dividend for 2012, and will resume paying half of the amount starting in the fourth quarter of 2013.

Moody’s Investors Service, which lowered Telefonica’s rating to Baa2 in June, said after the dividend suspension that the phone company still faces a potential downgrade depending on the Spanish sovereign debt situation and its effect on the company.

‘Huge Dividend’

Telefonica shares fell 0.8 percent to 11.26 euros in Madrid today, valuing the company at 51.2 billion euros. Telefonica shares have fallen 16 percent this year, while the Bloomberg Europe Telecommunication Services Index is down 1.5 percent. O2 Germany would have a market value of about 7.5 billion euros based on the high end of the target.

“Unless Telefonica is willing to pay a huge dividend to investors, combined with a low valuation, it seriously risks its possibilities of a successful IPO in Germany,” said Luis Benguerel, a trader at Interbrokers in Barcelona.

UBS AG and JPMorgan Chase & Co. are managing the IPO, while Bank of America Corp., BNP Paribas SA, Citigroup Inc. and HSBC Holdings Plc have been hired as bookrunners, people familiar with the matter have said.

E-Plus Rivalry

O2 Germany competes with Royal KPN NV’s E-Plus division in Germany, where the two largest wireless network operators are Deutsche Telekom AG and Vodafone Group Plc.

The Telefonica unit’s operating income before depreciation and amortization, or Oibda, may climb to 1.43 billion euros next year from 1.38 billion euros this year, and revenue may increase to 5.43 billion euros from 5.32 billion euros, according to estimates by Ahorro Corp.’s Garcia.

Operating cash flow, calculated as Oibda minus capex, may climb 5 percent next year to 854 million euros, Garcia said.

The German business reported Oibda of 333 million euros last quarter, a 12 percent increase from a year earlier. It had wireless-service revenue of 789 million euros, almost the same as E-Plus. The unit, which also offers fixed-line phone and Internet services, had 18.8 million mobile-phone customers as of June.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE