Telefonica Germany IPO Said to Be Boosted by Tax Credits
Telefonica SA (TEF)’s German unit, seeking to raise as much as 1.68 billion euros ($2.2 billion), can skip paying taxes the next three years because of tax credits that may make its initial public offering more attractive.
The allowances, stemming mostly from losses related to mobile-phone licenses acquired at the beginning of last decade, will enable Munich-based Telefonica Deutschland Holding AG to fully offset taxable earnings through 2015, according to its IPO prospectus. The tax credits have a net present value of 2.1 billion euros, or about 21 percent of the unit’s equity value, according to documents prepared by one of the banks managing the sale and seen by Bloomberg News.
From 2016 onward, the effective tax rate may be 12 percent to 13 percent, another document shows. That compares with the 34 percent tax rate for Deutsche Telekom AG (DTE) had last year and Vodafone Group Plc (VOD)’s 25 percent, both based on adjusted earnings. Under German law, 60 percent of taxable income can be offset against tax losses carried forward.
“The fact that Telefonica Deutschland will be able to benefit from not having to pay taxes in coming years makes the asset much more attractive to investors, as the company will be able to use that cash for further investments in the business,” said Peter Braendle, who helps manage about $55 billion at Zurich-based Swisscanto Asset Management. Braendle said he hasn’t decided whether he’ll buy shares in the unit.
Telefonica Chief Executive Officer Cesar Alierta is selling almost a quarter of the German unit’s stock as part of the Madrid-based former phone monopoly’s effort to reduce more than 58 billion euros of net debt.
As many as 258.8 million shares of Telefonica Deutschland are being offered at 5.25 euros to 6.50 euros each. The IPO values the German business at as much as 7.3 billion euros.
Albert Fetsch, a spokesman for Telefonica Deutschland, confirmed that the post-tax losses so far come from the amortizations of so-called UMTS wireless licenses. The rules are the same for all phone companies that post such losses, he said.
The share sale starts today and end Oct. 29, with trading debut in Frankfurt scheduled for Oct. 30. Telefonica will sell 225 million shares, with an option for an additional 33.75 million shares to meet strong demand, bringing the IPO to as much as 23.17 percent of the German unit.
Telefonica Deutschland’s second-quarter operating income before depreciation and amortization rose 12 percent to 333 million euros. Wireless-service revenue in the period totaled 789 million euros, almost the same as Royal KPN NV (KPN)’s E-Plus wireless brand in Germany.
The unit may say net income more than doubled to 200 million euros this year from 71 million euros a year ago, according to one of the documents. Net income may exceed 630 million euros in 2015, it shows.
Telefonica Deutschland will pay the banks acting as underwriters a base fee of 1.375 percent of the offering’s aggregate gross proceeds, as well as a possible additional discretionary fee of as much as 1.125 percent of the proceeds, according to the prospectus.
The German operator, which is considering “strategic options” for its Telefonica Germany Online Services unit, had 854.4 million euros of billed trade receivables from customers, of which 106.6 million euros, or 12.5 percent, were more than 60 days overdue, the prospectus shows.
Regulatory changes may pose a risk for both the company and investors, even as Germany’s economic environment is less volatile than southern European countries, according to Swisscanto’s Braendle.
“I’m concerned that regulation may change in the future because of the European debt crisis and the government could end up scrapping the tax deduction,” he said.
To contact the reporters on this story: Manuel Baigorri in Madrid at email@example.com; Cornelius Rahn in Frankfurt at firstname.lastname@example.org; Esteban Duarte in Madrid at email@example.com