Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

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.

Heavy Weight
Telefonica's debt remains stubbornly high despite a program of asset sales going back to 2012. Its net debt to Ebitda ratio is higher than other European telcos, putting its investment-grade rating at risk.
Source: Bloomberg

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.

Unpopular Mix
Telefonica's decision to put its undersea cable business into Telxius along with mobile towers proved unpopular with investors.
Source: Telxius IPO prospectus
Telefonica refers to OIBDA rather than Ebitda in its company filings

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.

Back of the Pack
Telefonica's shares have lagged European peers. Even after the crisis in its home market of Spain abated, problems in Latin America and concerns over debt have dogged the company.
Source: Bloomberg

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.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net