Telefonica Spain Recovery Sputters as TV Expansion Adds to Costs

  • Paying for television rights weighing on earnings at carrier
  • Spain rebound sought to counter weak Brazil performance

Telefonica SA’s burgeoning recovery in its Spanish home market hit a snag as costs from adding TV content weighed on earnings and competition hurt phone bills and subscriber growth.

The company reported Friday a 2 percent drop in fourth-quarter sales on an organic basis in its home market, reversing a recovery that had started in the previous quarter. Adjusted organic earnings in Spain fell about 7 percent, trailing the average estimate, according to analysts at Berenberg. The stock declined as much as 2.9 percent.

The Spanish drop leaves Telefonica with few growth markets as revenue is also shrinking from Brazil, its second-largest region, where the economy is struggling and the currency has declined. Telefonica has been spending more on TV programming in Spain to lure subscribers to pricier bundled packages and fend off competition. Sales there had risen for the first time in seven years during the third quarter.

The earnings “highlight that they still operate in tough and competitive markets," James Ratzer, an analyst at New Street Research LLP, said by phone from London. The results were affected by rising content costs, he said.

Shares of Telefonica fell 2.6 percent to 9.18 euros at 11:30 a.m. in Madrid. They had dropped 32 percent in the past year through Thursday.

As part of the Spanish sales push, the carrier offered customers discounted subscriptions to its pay-TV service until the end of the year and announced in January a 2.4 billion euro-agreement for Spanish and European soccer rights. The TV service is now part of bundles including mobile, landline and Internet services aimed at fighting rivals including Vodafone Group Plc and Orange SA.

Operating income fell 88 percent to 401 million euros excluding depreciation and amortization, hurt by the restructuring costs including 2.9 billion euros related to an early retirement plan. The net loss was 1.83 billion euros after a profit a year earlier. Sales were 11.9 billion euros, growing 3.3 percent on organic basis. Analysts had predicted 11.8 billion euros, according to data compiled by Bloomberg.

The company is awaiting European regulatory approval for the sale of its O2 unit in the U.K. to CK Hutchison Holdings Ltd. Telefonica has already earmarked the proceeds to pay down part of its debt, as it seeks to avoid a credit rating downgrade. The carrier has said it expects the sale to be completed by the end of the first half and that it has other cash-raising options with O2 if the sale falls through.

The company projected organic revenue growth of more than 4 percent for this year, with a stabilizing Oibda margin. It plans a dividend of 75 cents a share provided that the O2 sale is completed.

Net debt reached 49.9 billion euros in December, up by 4.83 billion from a year earlier, driven by spending on shareholder rewards, spectrum and labor-related costs.

In Brazil, the local unit Thursday reported a 11 percent decline in fourth-quarter net income. The earnings that Telefonica receives from the country are further reduced by the Brazilian real’s drop against the euro over the past year.

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