KKR's Towering Contribution in Spain

Deal shows Telefonica is not a forced seller of assets.
At Closing, April 23rd
8.33 EUR
At Closing, April 23th
21.31 USD

Telefonica SA has just yelled "told you so" at the stock market. By finding a private equity buyer for a stake in its infrastructure unit, the Spanish telecom giant can claim its decision to pull the business's flotation last year on valuation grounds was right. The boost to its credibility could be useful.

On Tuesday, Telefonica said it would sell 25 percent of Telxius, its mobile tower and undersea cable subsidiary, for 790 million euros ($832 million) to funds run by KKR & Co LP. KKR has the option to buy a further 15 percent for 485 million euros, and Telefonica can force them to do so by year end.

If the full 40 percent is sold, Telefonica will have secured the proceeds it targeted in September's attempted IPO at a price just inside the then mooted range.

Missed Out

Europe's mobile towers groups have lagged since the failed Telxius IPO. That's because they're utility-like and trade as bond proxies, leaving them out of the rally

Source: Bloomberg

What does KKR like that stock-market investors didn't?

The timing of the IPO, just when income stocks were falling from grace in expectation of higher interest rates, was unfortunate. Worse, investors didn’t like how Telefonica had lumped undersea cables, which connect Europe and North America to Latin America, with mobile towers. The cables accounted for almost 60 percent of revenue and two-thirds of operating profit. Investors gave this part of the company a lower multiple than the portfolio of 16,000 mobile towers, and struggled to find listed peers to benchmark against.

Weighed down

Telxius consists of two business lines, and the cable part carries lower valuation multiples

Source: Telxius IPO prospectus

Telefonica refers to OIBDA rather than Ebitda in its company filings

KKR is evidently more relaxed about the business mix -- so much so that it's settling for a minority stake. Usually, private equity buyers want full control so they can get ruthless with costs and balance sheet efficiency. Still, this is not KKR's first minority investment and its willingness to accept influence rather than control may have given it an edge over any rival buyout bids.

As a semi-passive investment, this could still work for KKR. There's scope to add more debt to Telxius, if Telefonica allows. The constraint is that Telxius is still consolidated on Telefonica's books. Telxius net debt is just 490 million euros, or 1.5 times 2017 Ebitda -- modest for a telco infrastructure business. Piling on more debt could fund a quick dividend returning much of the initial investment. Telxius's ongoing cash generation could fund annual dividends on top.

Investing for income isn't how private equity typically does things, but a shortage of buyout targets may be making KKR more open-minded about how it secures returns for its clients.

Telefonica can be pleased with the outcome. It has proven that it's not a forced seller of assets despite holding 50 billion euros of debt at the end of September. Having trimmed the dividend, the imperative to make disposals to delever isn't as desperate, especially since free cash flow is expected to start increasing again this year.

Doubtless the group was bruised in its brush with the public markets last year. But there's nothing to stop a Telxius IPO happening in the future if the unit performs well. And if Telefonica brings its British 02 mobile operator to market, investors will now be minded that they might not be the only buyers.

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

    To contact the authors of this story:
    Leila Abboud in Paris at
    Chris Hughes in London at

    To contact the editor responsible for this story:
    James Boxell at

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