Telefonica May Defer Latin America IPO as Pressure Eases
Telefonica SA (TEF) suspended preparations for an initial public offering of its Latin American business after a stake sale in its German unit and a bond issue relieved funding needs, people with familiar with the matter said.
Telefonica, which hadn’t hired banks for the IPO, won’t resume the project unless there is strong investor appetite or pressure from rating companies increases, the people said, asking not to be identified because the discussions are private. A sale could raise as much as 6 billion euros ($8 billion), the finance chief of Telefonica’s Brazilian unit said in December.
“I would be inclined to view them suspending the IPO as a positive,” said Paul Marsch, an analyst at Berenberg Bank in London who recommends investors sell Telefonica shares. “You could argue having to IPO one their best assets at a low point in valuation is a sign of desperation and not the best thing to be doing for shareholders.”
Telefonica announced plans in May to analyze a possible listing of its Latin American business to help reduce debt. Since then, Spain’s largest phone company has halted its dividend and sold a stake in German unit Telefonica Deutschland Holding AG (O2D) to raise 1.45 billion euros. Last month, Telefonica sold 1.5 billion euros of 10-year bonds.
A representative for Madrid-based Telefonica declined to comment. El Confidencial reported the IPO decision today.
The company’s net debt dropped to 52.8 billion euros in November from 58.3 billion euros at the end of June and investors have rewarded Telefonica over measures to lower debt.
The cost of insuring Telefonica bonds using credit-default swaps has fallen by more than half from an an all-time high in June, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Telefonica’s long-term debt is rated at the second-lowest investment grade by Moody’s Investors Service and Standard & Poor’s, at Baa2 and BBB, respectively. Fitch Ratings has a BBB+ ranking, or three steps above junk.
Telefonica shares fell 1.3 percent to close at 9.95 euros in Madrid today. The stock has dropped 24 percent in the past 12 months, cutting the company’s value to 45.3 billion euros.
“We do not need to do that transaction, but we may decide to do it depending on what provides the best value for our shareholders,” Finance Chief Angel Vila told analysts on Nov. 7, when asked about plans for an IPO of the business.
Brazil is Telefonica’s biggest market in Latin America. Other countries in the region where it operates include Argentina, Chile, Peru, Mexico, Venezuela and Colombia. Billionaire Carlos Slim’s America Movil SAB is the Spanish company’s biggest rival in the region.
Carriers in Latin America are facing increased competition from so-called mobile virtual network operators, which have lower costs because they don’t own infrastructure. Profit margins are also under pressure as regulators are scrutinizing fees providers may charge for calls terminating on their networks, and governments push them to hasten the deployment of faster grids.
Venezuela plans to devalue the bolivar by 32 percent starting Feb. 13, Finance Minister Jorge Giordani told reporters last week. That cuts the value of Telefonica’s local subsidiary, according to Banco Espirito Santo SA analysts.
“The equity story for Telefonica in Latin America has undoubtedly become a tougher sell,” Berenberg Bank’s Marsch said. “It’s still a growth market, but the costs of that growth are higher than people hoped that they would be some two or three years ago.”
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