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Telefonica Said to Get $5.5 Billion Germany Dividend

Telefonica Chief Executive Officer Cesar Alierta
Chief Executive Officer Cesar Alierta is reversing Telefonica’s decade-long expansion strategy based on acquisitions and is selling assets from Germany, Latin America to China to help pare more than 58 billion euros in net debt. Photographer: Angel Navarrete/Bloomberg

Oct. 11 (Bloomberg) -- Telefonica SA, the Spanish phone company battling with growing debt and a potential rating cut, received a dividend of 4.3 billion euros ($5.5 billion) from its German business weeks before kicking off the unit’s initial public offering, according to documents seen by Bloomberg News.

The cash dividend was paid to Telefonica on Sept. 14, presentations prepared by banks to gauge demand for the IPO show. Telefonica at the same time canceled a “capital promise” of 2.9 billion euros to Telefonica Deutschland Holding AG, which will have net debt of 1.2 billion euros at the end of this year, according to the documents.

The maneuver will help shore up the finances of Madrid-based Telefonica as it seeks to avert another rating cut after Spain’s debt was reduced to one level above junk by Standard & Poor’s yesterday. Stripping the German mobile-phone unit of its cash and increasing its net debt before the IPO could help lower the unit’s average cost of capital, said Carlos Winzer, a senior vice president at Moody’s Investors Service.

“Telefonica Deutschland had a very strong cash position and no debt, so this move will allow the German unit to have a more efficient balance sheet structure,” said Winzer, who has covered Telefonica for 20 years.

The cost of insuring Telefonica bonds using credit-default swaps fell by 10 basis points, or 3 percent, to 318 basis points from an intraday high after Bloomberg’s report. That insurance cost has declined 44 percent since reaching a record on June 27, according to Bloomberg data.

Paring Losses

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Telefonica shares pared earlier losses of as much as 1.7 percent and closed 0.5 percent higher at 10.21 euros in Madrid. The stock has fallen 24 percent this year, valuing the company at 46.4 billion euros.

A Telefonica official declined to comment, as did Roland Kuntze, a spokesman for Munich-based Telefonica Deutschland.

Chief Executive Officer Cesar Alierta is reversing Telefonica’s decade-long expansion strategy based on acquisitions and is selling assets from Germany, Latin America to China to help pare more than 58 billion euros in net debt.

Since 2007

Telefonica plans to sell a stake of 20 percent to 30 percent in Telefonica Deutschland, the documents show. The shares will start trading in Frankfurt this quarter, the company said last week.

A 20 percent stake for as much as 1.5 billion euros would value Telefonica Deutschland’s equity at 7.5 billion euros, people familiar with the matter have said. A 1.5 billion-euro IPO would be the biggest in Germany since engine maker Tognum AG raised 1.8 billion euros in 2007.

Of the 4.3 billion-euro cash dividend Telefonica received last month, 1.3 billion euros came from Telefonica Deutschland’s cash reserves, according to the documents. The dividend also includes a 1.25 billion-euro inter-company loan and 1.05 billion euros from operational free cash flow plus cash from transfer agreements, with the remaining 700 million euros from proceeds from carve-out assets, the documents show.

Telefonica Deutschland, with 18.8 million mobile-phone customers at the end of June, vies for the position of the third-largest wireless company in Germany, where Vodafone Group Plc and Deutsche Telekom AG are the leaders.

The Telefonica unit’s revenue will climb by 3 percent annually between 2012 and 2015 as the mobile-phone business will offset weaker growth from fixed-line and cable, according to the documents. Operating income before depreciation and amortization may increase 5 percent annually in the period, the documents show.

UBS AG and JPMorgan Chase & Co. are managing the IPO, with help from Bank of America Corp., BNP Paribas SA, Citigroup Inc. and HSBC Holdings Plc.

To contact the reporters on this story: Manuel Baigorri in Madrid at; Esteban Duarte in Madrid at

To contact the editor responsible for this story: Kenneth Wong at

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