Telefonica Czech Stock Hurt by Developments in Auction, CFO Says

Telefonica Czech Republic AS shares are being hurt by a failed license auction and speculation of another round of asset sales by its Spanish parent, Chief Financial Officer David Melcon said.

The Czech telecoms regulator canceled a radio-frequency auction last month creating uncertainty over the process for awarding pushing the stock down 23.7 percent since Nov. 12. The shares traded at 283 koruna as of 1:52 p.m. The consensus of 20 analysts recommendation tracked by Bloomberg for the price in 12 months is 329.77 koruna.

“We monitor very closely the value of our shares and they clearly have been impacted mainly by the auction, rumors of a possible sale and regional sentiment -- all of which are beyond our control,” Melcon said in an April 5 interview in Prague.

Telefonica SA, Europe’s most-indebted telephone company, may sell assets to slash net debt by more than 4 billion euros ($5.2 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, the people, asking not to be identified because the deliberations are confidential, said last week. Melcon declined to comment on the reports.

Higher Charges

The Czech Telecommunications Office canceled the sale of 800 MHz, 1,800 MHz and 2,600 MHz spectra over concerns that bids totaling more than 20 billion koruna ($1 billion) would boost costs for customers through higher charges for Internet services. While governments across the region are cutting spending to meet austerity needs, they are also concerned a simultaneous rising cost of living is creating voter anger.

The decision to cancel the auction “was good” since the process was taking too long, Melcon said, adding “there’s no formula, but in other countries it lasted a few weeks.”

The Czech regulator immediately started drafting new rules to replay the auction this year. Melcon wouldn’t comment on Telefonica’s bid or the possible timing of the new auction.

“There is still a lot uncertainty about how the new auction rules will look and whether they won’t favor new entrants to the market,” said Cyrrus AS analyst Tomas Mencik, who has a hold recommendation on the shares.

Existing operators T-Mobile Czech Republic AS, Telefonica and Vodafone Czech Republic bid for the licenses along with PPF Mobile Services AS, a newcomer to the market.

The mobile data market is growing fast as traffic, 40 times less than in fixed data, catches up, Melcon said. Smart- phone penetration among Czech Telefonica customers was 27 percent at the end of December and 71 percent of handsets sold in the stores were smart phones, Telefonica said Feb. 27.

‘Limited’ Erosion

The company’s margin for operating income before depreciation and amortization, or Oibda, is still very “healthy” with only “limited” erosion forecast for this year from 41.4 percent in 2012, Melcon said.

Fourth-quarter Oibda fell 13 percent to 5.09 billion koruna as revenue declined 5 percent to 12.8 billion koruna, according to Telefonica CR results, published Feb. 27.

“I think we have a mixed story,” Melcon said. “If you look at our top line, some revenues are shrinking, that’s the reality. But we have others that are growing, like Slovakia, information and communication services for companies and mobile data.”

Telefonica CR has started the deployment of Long Term Evolution, or LTE, network on its existing 1,800 MHz spectrum to provide fast mobile data in Prague and Brno. Capital expenditure will be less than 6 billion koruna this year, excluding the potential costs of the spectrum auction, he said.

Markets Open

The company will use leverage for any winning bid in the new spectrum auction, though Melcon wouldn’t specify whether Telefonica would issue bonds or use loans.

“We didn’t approach the markets during the auction as it was still running and we didn’t know what the outcome would be,” he said. “When we refinanced our existing loan in summer, the process was very flexible and there are a lot of parties willing to cooperate with Telefonica.”

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