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Telefonica’s German Unit to Sell Bonds After Shares Gain

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Telefonica Deutschland has gained 10 percent in Frankfurt trading since the division’s initial public offering in October. Photographer: Ralph Orlowski/Bloomberg
Telefonica Deutschland has gained 10 percent in Frankfurt trading since the division’s initial public offering in October. Photographer: Ralph Orlowski/Bloomberg

April 3 (Bloomberg) -- Telefonica SA’s German unit plans to sell euro-denominated bonds for the first time as early as this month as the parent seeks to take advantage of the country’s lower borrowing costs, according to terms sent to investors.

Telefonica Deutschland Holding AG hired UBS AG, Bank of America Corp., BayernLB and Commerzbank AG to help sell senior unsecured notes maturing in five to seven years, terms obtained by Bloomberg News showed. The sale would be benchmark in size, which is typically at least 500 million euros ($640 million), according to the documents. Fitch Ratings ranks the Munich-based unit’s debt BBB, the second-lowest investment grade.

Chief Financial Officer Rachel Empey is meeting investors in Frankfurt, Munich, Amsterdam, London, Zurich and Paris this week to explain the sale. Spain’s Telefonica, Europe’s most indebted telecommunications company, is borrowing through the growing German unit as sales in its shrinking home economy drop.

“Telefonica is clearly seeking to tap the bond markets through its German unit to raise financing at lower costs compared to Spain,” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valore. “They can afford that because Telefonica Deutschland isn’t too leveraged.”

Telefonica Deutschland had 842 million euros of net debt at the end of 2012, compared with 51.3 billion euros for its Spanish parent.

Loan Repayment

The new bonds will help repay a 1.25 billion-euro inter-company loan that Telefonica made to the German unit to help fund a 4.3 billion-euro dividend it received last September.

Miguel Angel Garzon, a spokesman for Telefonica in Madrid, declined to comment.

Telefonica is also taking advantage of renewed appetite for debt securities as the risk premium on Spain’s sovereign debt narrows.

The Spanish Treasury’s borrowing costs are at 4.89 percent for 10 years, compared with 1.3 percent for Germany. That compares with a euro era record of 7.75 percent on July 25, before ECB President Mario Draghi brought yields down by pledging to do “whatever it takes” to defend the euro.

Spanish sovereign debt returned investors 3 percent in the first quarter, the second highest rate after Ireland among 26 markets tracked by indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt offered 0.4 percent.

Debt Reduction

Telefonica Deutschland rose 0.5 percent to close at 6.20 euros in Frankfurt, taking its gains since the stock’s October debut in Frankfurt to 11 percent and valuing the company at 6.9 billion euros. Telefonica fell 2.4 percent in Madrid, giving the company a market value of 47.1 billion euros.

The cost of insuring Madrid-based Telefonica’s bonds using credit-default swaps has risen more than 7 percent this year. It slipped 0.8 percent to 237 basis points today.

The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

Telefonica is studying other options to reduce debt such as selling corporate hybrid bonds, according to three people familiar with the matter. A sale of such securities, which allow companies to borrow without putting their ratings at risk because ratings firms count 50 percent of the bonds as equity, would follow similar moves by Royal KPN NV and Telecom Italia SpA.

German IPO

Telefonica plans to sell more non-core assets this year as Chief Executive Officer Cesar Alierta is trying to reduce net debt to less than 47 billion euros this year. The plan follows last year’s disposals, which included shares in its German business, call-center Atento and part of its China Unicom (Hong Kong) Ltd. stake. Last week, Telefonica raised about 975 million euros selling some treasury stock.

Telefonica Deutschland, which vies with Royal KPN NV’s E-Plus unit for the No. 3 spot in Germany behind mobile leaders Vodafone Group Plc and Deutsche Telekom AG, had a 16 percent wireless-service market share at the end of 2012, according to the presentation to investors. Vodafone had 34.4 percent of the market, Deutsche Telekom had 33.9 percent and E-Plus had 15.8 percent.

Last year, Telefonica Deutschland’s operating income before depreciation and amortization rose 11 percent to 1.28 billion euros. Sales climbed 3.5 percent to 5.21 billion euros.

As part of its strategic priorities for 2013, Telefonica Deutschland plans to boost earnings through faster data services. The company is set to start offering faster wireless service using long-term evolution, or LTE, technology in Germany’s biggest cities during the first half, according to the presentation.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Esteban Duarte in Madrid at eduarterubia@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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