Telefonica SA will cut its stake in Telecom Italia SpA by more than a third following the 750 million-euro ($1 billion) sale of convertible bonds to comply with regulatory demands to dispose of assets.
Telefonica’s new bonds will mature on July 24, 2017, and will be exchangeable for as much as 6.5 percent of Telecom Italia’s shares, the Madrid-based carrier said in a regulatory filing today. Once the bonds are exchanged, Telefonica’s holding in the Italian carrier will drop to within a range of 8.3 percent and 9.4 percent, according to the filing. The bonds will carry a fixed annual interest rate of 6 percent.
Telefonica is seeking to comply with an order in December by Brazilian antitrust regulator Cade. The carrier was told that it had to divest local assets if it holds on to its stake in Telecom Italia, one of its main competitors in Brazil, its second-largest market. Telefonica owns an indirect stake in Telecom Italia through Telco SpA, a holding it formed with Italian companies Assicurazioni Generali SpA, Mediobanca SpA and Intesa Sanpaolo SpA.
“With this transaction, Telefonica will cut its indirect stake in Telecom Italia to levels below those it had prior to Telco SpA’s recapitalization in September 2013,” the Madrid-based carrier said in the filing. The sale also allows it to “neutralize” a potential increase in debt that could derive from the breakup of Telco.
The Telco venture is set to unravel later this year after Telefonica’s three partners announced they would sell their stakes. Once Telco disbands, Telefonica would own a direct stake of about 15 percent stake in Telecom Italia if the bond exchange weren’t held.
The bond sale “is positive and for a couple of reasons,” Andres Bolumburu, an analyst at Banco de Sabadell SA, said in a telephone interview yesterday. “It’s a gesture to Cade that they are willing to lower their presence in Telecom. It is also a way to cut the impact of the breakup of Telco, when it happens.”
The price at which the bonds will be exchanged is in a range of 86 cents and 1.032 euros per Telecom Italia share, Telefonica said in the filing.
Telefonica declined 1.3 percent to 12.13 euros at 9:51 a.m. in Madrid and Telecom Italia stock dropped 2.5 percent to 88.6 euro cents.
Telefonica has been in talks with Oi SA, Brazil’s largest land-line carrier, to split up Telecom Italia-controlled Tim Participacoes SA, the country’s second-largest wireless operator, people familiar with the talks have said. Telecom Italia and the Italian government oppose the plan on concerns that it would diminish the company’s position in the South American country.
Telco announced June 26 a 830.5 million-euro writedown of its Telecom Italia stake, valuing it at about 3.8 billion euros.
HSBC Holdings Plc, JPMorgan Chase & Co. and Societe Generale SA were the joint bookrunners for the bond sale, Telefonica said in a separate statement yesterday.