Telefonica to Look for More M&A, Network-Sharing Deals

Telefonica SA, which this week agreed to buy Royal KPN NV’s German wireless business, said it plans to continue to seek cost savings through mergers and acquisitions as well as network-sharing agreements.

Confident of reaching its goal of cutting net debt to less than 47 billion euros ($62 billion) by the end of this year, Telefonica will actively manage its portfolio of assets either by selling or buying businesses, Chief Financial Officer Angel Vila said after its second-quarter earnings report today.

“This type of approach to the market, trying to get a better position -- being in market share or being in potential to create value -- will continue,” he said. “We will explore opportunities for doing so in each one of the markets where we operate and potentially so in Latin America.”

The combination of Telefonica’s O2 and KPN’s E-Plus, two of Europe’s fiercest competitors, sets up the likelihood of more deals in a region where phone companies struggle to keep up profitability and need to boost investments in faster services. With earnings under pressure, carriers from EE in the U.K. and France’s SFR to Telecom Italia SpA and Spain’s Yoigo are considering partnerships or share sales.

Telefonica predicts its $10.7 billion German acquisition and the sale of its Irish unit last month to Hutchison Whampoa Ltd. won’t face significant regulatory hurdles, Chief Operating Officer Jose Maria Alvarez-Pallete said on the same call.

Telecom Italia

“It doesn’t make sense to have so many players in Europe,” he said. “If Europe as a region wants to play scale it needs to consolidate. That consolidation is going to be in the interest of European consumers and therefore it needs to happen.”

Telefonica, which holds a 10.5 percent indirect stake in Telecom Italia through Telco SpA, still sees value in keeping the investment, Vila said. Telco, whose other investors are Assicurazioni Generali SpA, Intesa Sanpaolo SpA and Mediobanca SpA, owns 22.4 percent of Telecom Italia.

“We are not contemplating taking full control of Telco but we are talking to our partners to convince them on the merits of extending such structure,” Vila said, referring to the shareholder agreement.

Telefonica shares climbed 1.6 percent to close at 10.44 euros in Madrid, valuing the company at 47.5 billion euros.

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