Telefonica Could List O2 This Year as Telxius IPO Progresses

  • Carrier ready for U.K. unit’s IPO if market conditions right
  • Selling a stake in O2 to strategic investor still an option

Telefonica SA, moving forward with a sale of stock in its infrastructure business as it seeks to pare debt, could do the same with its British wireless unit O2 this year if market conditions are favorable, Chairman Jose Maria Alvarez-Pallete said.

“We have been working to list it, so if today or in the next few weeks we decided to do so, we could do it by year’s end,” Pallete said of O2 at a dinner with reporters Sunday in Santander, Spain. Selling a stake in the U.K. carrier to a strategic investor is also still an option, he said. “We could objectively do either one of the two things by year’s end. If markets closed, we would wait. We don’t have the obligation to list or sell at any price.”

Jose Maria Alvarez-Pallete in Santander.
Jose Maria Alvarez-Pallete in Santander.
Photographer: Antonio Heredia/Bloomberg

Telefonica was counting on proceeds from the planned 10.25 billion-pound ($13.7 billion) sale of O2 to CK Hutchison Holdings Ltd. to reduce its debt load of about 53 billion euros, before the European Union in May blocked the deal on competition concerns. The O2 sale, an IPO of at least 25 percent of Telefonica’s infrastructure unit Telxius, confirmed Monday, and increasing free cash flow generation will allow the company to meet its target of lowered debt, Pallete said.

The company expects free cash flow and operating income before depreciation and amortization, or Oibda, to be higher in 2017 than in 2016, Pallete said, without forecasting how much either metric would be.

Shares of Telefonica advanced 1.9 percent to 9.35 euros at 11:09 a.m. in Madrid. They’ve declined about 9 percent this year.

Despite debt concerns, the company’s annual dividend of 75 cents (84 U.S. cents) a share is sustainable, Pallete said. Telefonica could maintain the payout at that level in 2017 by giving shareholders stock if needed -- a so-called scrip dividend -- allowing the company to keep more cash available, he said.

In July, Telefonica scaled back its debt-reduction goal, saying it’ll reach a net-debt-to-Oibda ratio of 2.35 in the “the mid-term.” In February, the company had said the target would be reached this year, pending the sale of O2, which at the time was facing regulatory review. The ratio stood at 3.2 at the end of June.

The IPO of Telxius is set to take place this year, Telefonica said in a regulatory filing. The company will decide the price range as well as the percentage of the unit it will offer in the next few weeks, once it has gauged “investor appetite,” Pallete said. An IPO could give the unit an equity value of as much as 3.5 billion euros, people with knowledge of the matter said in June.

Telefonica had put plans for a Telxius IPO, as well as a listing for O2, on hold after U.K. voters chose to leave the EU in a June 23 referendum. The shock Brexit decision caused stock indexes to fall globally.

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