Telefonica Is Said to Consider Next Round of Asset SalesManuel Baigorri and Cornelius Rahn
Telefonica SA, Europe’s most indebted telephone company, is considering another round of asset sales to help meet its target of slashing net debt by more than 4 billion euros ($5.1 billion) this year, according to people with knowledge of the matter.
The Irish and Czech divisions are high on a list of potential businesses for sale, said the people, asking not to be identified because the deliberations are confidential. Other candidates include Madrid-based Telefonica’s remaining minority stake in China Unicom (Hong Kong) Ltd. and assets in Central America, the people said. No decision has been made and no banks have been hired, they said.
Telefonica, a year into its most ambitious asset disposal program, could raise 1 billion euros from its Irish and Central American units, and another 1 billion euros by cutting its stake in Telefonica Czech Republic AS to 50 percent from 69 percent, according to asset manager FM Capital Partners Ltd. The 5 percent holding in China Unicom is valued at $1.6 billion.
“They’re under much less pressure than they were nine months ago, and now they’re in business-as-usual mode rather than a fire-sale mode,” said Stephane Beyazian, an analyst at Raymond James Euro Equities in London. “If they’re under the gun, they could sell some bits and pieces.”
A spokesman for Telefonica declined to comment on the company’s asset-disposal plans.
Telefonica Czech Republic shares fell 4.6 percent to 288.2 koruna in Prague, the lowest level in nine years. Telefonica added 0.2 percent to 10.38 euros on the Madrid exchange. China Unicom rose 0.4 percent to HK$10.24 Hong Kong yesterday. The Hong Kong market is closed today for a holiday.
After an $85 billion acquisition spree over a decade increased debt and triggered rating cuts, Chief Executive Officer Cesar Alierta last year began selling assets and has suspended dividend payments. As pressure from rating companies eased following the sale of a stake in its German business, Telefonica has halted plans for an initial public offering of its Latin American business, which generated about half of the company’s 62.4 billion euros in sales last year.
Still, at 51.3 billion euros as of Dec. 31, Telefonica’s net debt exceeds its market value. Its stock has lost 11 percent over 12 months through yesterday while Spain’s IBEX Index was little changed.
Telefonica Czech Republic, which includes Slovakia, reported 2012 operating income before depreciation and amortization of 832 million euros, an 11 percent decline from a year earlier, as sales dropped 5.7 percent to 2 billion euros. In the Czech Republic, Telefonica offers services including fixed line, Internet, mobile and pay TV, and competes with Vodafone Group Plc and Deutsche Telekom AG’s local units.
The Czech unit received a takever offer from a financial company last year but was rejected as too low, two of the people said.
In Ireland, where Telefonica took a 513 million-euro writedown last year, Oibda fell 37 percent to 130 million euros as revenue declined 13 percent to 629 million euros.
Telefonica’s assets in Central America include Guatemala, Panama, Costa Rica, El Salvador and Nicaragua.
Telefonica sold about half of its stake in China Unicom, the country’s second-largest wireless carrier, in June last year with a 12-month lock-up for the remaining 5 percent.
“Telefonica is trying to overshoot its debt-reduction targets,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at FM Capital in London. Asset sales “will help the company ease credit concerns, avoid further downgrades and become an attractive play for both equity and debt investors.”
The cost of insuring the company’s bonds using credit-default swaps rose 0.6 percent to 232 basis points today. It’s dropped by more than half since reaching an 11-year high in June, following downgrades by Standard & Poor’s and Moody’s Investors Service, according to data compiled by Bloomberg. That’s still higher than competitors such as Deutsche Telekom, Royal KPN NV, and France Telecom SA.
The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
In addition to asset sales, Telefonica is also looking for cheaper debt financing outside Spain. Its German unit, Telefonica Deutschland Holding AG, is gauging investor demand for its first euro-denominated bonds this week to take advantage of the country’s lower borrowing costs.
The unit hired UBS AG, Bank of America Corp., BayernLB and Commerzbank AG to help sell senior unsecured notes maturing in five to seven years, terms obtained by Bloomberg News showed. The sale would be benchmark in size, which is typically at least 500 million euros.
“Further asset disposals per se will not trigger a rating upgrade,” said Carlos Winzer, an analyst at Moody’s, which rates Telefonica’s debt Baa2, the second-lowest investment grade. Its negative outlook “reflects the group’s exposure to the Spanish market and puts it at risk given the weak macroeconomic conditions.”
Telefonica has taken advantage of narrowing Spanish-German 10-year yield spread to sell bonds and refinance debt. The company said last month it will exchange bonds maturing in 2015 and 2016 for bonds due in 2021.
The carrier’s other non-core assets include mobile-phone towers. Abertis Infraestructuras SA, whose businesses expand from toll-roads to airports and telecommunications, said in February it’s in talks with Telefonica, Vodafone and France Telecom’s Orange to buy more than 1,000 mobile-phone towers mostly in Europe. Telefonica also plans to sell its 2 percent stake in Portugal Telecom SGPS SA. It also owns an indirect holding in Telecom Italia SpA.
The Spanish company should be able to meet growth and debt-reduction goals this year, said Heinrich Ey, who helps manage more than 250 billion euros at Allianz Global Investors in Frankfurt, including Telefonica shares.
Outside Spain, still its biggest market despite steeper competition from rivals from Jazztel Plc to TeliaSonera AB’s Yoigo unit, growing uncertainties from Cyprus and the European Union could pose risks for the Telefonica’s operations and asset disposal plans, Ey said.
“The company really needs to be prepared to sell such assets as its stake in China Unicom or its business in Ireland because their debt level remains very high,” he said.