Telefonica CEO Turns to Latin America After German IPO

Telefonica Chief Executive Officer Cesar Alierta
Telefonica SA Chief Executive Officer Cesar Alierta is reversing a decade-long acquisition spree to avert a downgrade of the company’s debt ratings as Europe’s sluggish economy hurts sales. Photographer: Angel Navarrete/Bloomberg

Telefonica SA Chief Executive Officer Cesar Alierta, having lowered the Spanish phone company’s debt by 5.5 billion euros ($7 billion) from asset sales in Europe and Asia, has won additional time to decide on a separation of its Latin American business.

“We do not need to do that transaction, but we may decide to do it depending on what provides the best value for our shareholders,” Finance Chief Angel Vila told analysts today when asked about plans for an initial public offering of the business. “We are still in the process of internal analysis.”

Telefonica today posted third-quarter earnings for Latin America that beat those from Spain and some analysts’ estimates. Alierta, 67, is under less pressure to sell shares in the business as net debt and funding costs have declined, people familiar with the matter said. The Madrid-based company may even cancel plans to spin off the assets, depending on its credit ratings, the people said, asking not to be identified because the deliberations are private.

Alierta is reversing a decade-long acquisition spree to shrink a debt pile that ballooned to more than 58 billion euros. In the past months, Telefonica sold a stake in China Unicom (Hong Kong) Ltd., sold shares in its German unit, and disposed of the Atento call-center division.

Listing Options

One option being considered for the Latin American operations is the creation of a holding company, excluding Argentina and Venezuela, and to list the shares in Sao Paulo or New York, the people said. An alternative is to sell more shares of its existing business in Brazil, they said. Sanford C. Bernstein analysts valued the assets at 47 billion euros in July.

Latin America’s operating income before depreciation and amortization rose 4.8 percent to 2.69 billion euros last quarter as sales gained 3.8 percent to 7.62 billion euros. Still, revenue growth slowed from the second quarter’s 5.8 percent.

That compares with an estimate of 0.9 percent Oibda growth and 4.2 percent revenue growth by Andres Bolumburu, an analyst at Banco de Sabadell in Madrid. Telefonica’s earnings in the region climbed because of tighter cost control and the sale of mobile-phone towers, he said.

“Latin America is still growing strongly,” Bolumburu said by phone. “Even though they weren’t wonderful, they slightly changed the trend from previous quarters.”

No Decision

The different structures being analyzed have different potential consequences “from regulatory, tax and other implications,” Vila said. “None of them are more clear or differential than others. We have not taken any decision not only with respect to any structure but with respect to whether the transaction will be performed or not next year.”

Alierta is relying on Latin American growth to offset stiffer competition at home, where a slumping economy is hurting demand and France Telecom SA’s Orange and TeliaSonera AB’s Yoigo are winning customers. Spain is still Telefonica’s biggest market, followed by Brazil.

Telefonica, the biggest phone company in Spain, declined

2.1 percent to 10 euros in Madrid, valuing the company at 45.5 billion euros. It climbed as much as 2.3 percent earlier today.

Telefonica said its net debt has dropped to 52.8 billion euros from 58.3 billion euros in June. The yearend target is 50 billion euros, Vila said. In addition to asset sales, Telefonica also plans to swap 2 billion euros in preferred shares for bonds and treasury stock.

Portugal Telecom

Telefonica has received offers for other assets and will assess whether or not they add value for the company, Vila said today. Telefonica is “monitoring market conditions” to sell its 2 percent stake in Portugal Telecom SGPS SA, he said.

Telefonica reiterated its 2012 targets, including a net debt goal of less than 2.35 times Oibda. The phone company also stuck to a plan to pay a 75-cent dividend in 2013.

Third-quarter earnings excluding some items topped analysts’ estimates, helped by Latin America. Oibda was 5.35 billion euros, compared with the average analyst estimate of

5.33 billion euros, according to data compiled by Bloomberg. Sales for the period declined 1.6 percent to 15.5 billion euros.

Net income was 1.38 billion euros, compared with a loss of 429 million euros a year earlier. Analysts had predicted profit of 1.4 billion euros. In the year-earlier quarter, Telefonica had 2.6 billion euros in job-cut expenses.

“I see nothing that’s incrementally worrisome or materially positive,” said Guy Peddy, an analyst at Macquarie Securities in London. “They’ve done what they said they would do, so they tick the boxes in the quarter.”

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