Telefonica's pulling of the listing of its infrastructure unit won't have been a happy occasion for the Spanish telecoms giant. Gadfly noted last week that it erred by not including more compelling assets in the spin-off. Its shares fell 5 percent on Friday.
Yet in refusing to cut the value of the IPO below its already lowered expectations, the company is also sending out an important message to the market: don't think you can push us around on price.
It's a dicey strategy for Telefonica, which must make progress on lowering its 53 billion euro ($59 billion) debt pile or risk a credit downgrade next year.
The sale of a 40 percent stake in Telxius, which owns about 16,000 mobile towers and several undersea Internet cables, aimed to raise up to 1.5 billion euros to pay some debt. But the decision to heavily weight the new offshoot toward undersea cables -- unfamiliar to investors and with few listed peers -- cooled interest. Instead of pushing on by selling Telxius at a knock-down price, Telefonica halted the IPO on Thursday night.
Why do this when it's so desperate for cash? The answer may lie in the next item on its to-do list: selling shares in its British mobile operator 02. By scrapping the Telxius offer, Telefonica has signalled to investors that it shouldn't be seen as a distressed seller willing to accept any price for its assets. That's also important if Telefonica decides to sell anything to strategic buyers or private equity.
Getting the 02 listing done is far more important to Telefonica's debt-reduction efforts, since the unit could be worth around 10 billion pounds ($13 billion). Its rating worries started in May when Brussels rejected its plan to sell 02 to Hutchison for 10.2 billion pounds. Telefonica is now expected to list only a minority stake so it can still consolidate the operating profit in its accounts, so could potentially raise about 4 billion pounds.
Moody's analyst Carlos Winzer says Telefonica needs to raise "over 10 billion euros" in cash to keep its investment-grade rating. Telxius would have been one part of the solution; other options include issuing more convertible bonds and selling other small assets. It could now try to carve up Telxius by selling the undersea cables separately, or look at offloading a stake in the business to an infrastructure fund.
Telefonica seems unwilling to entertain another obvious way to cut debt, namely scrapping its dividend or paying it in shares. Doing so would save about 3.5 billion euros a year, going a long way to ease the concerns of rating agencies. It would, however, hit the shares hard since yield is everything to telecoms investors. That may be unpalatable to Telefonica management, but the day for such tough calls is inching closer.
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