Telefonica Czech Sale Seen Drawing No Premium Bid

Telefonica SA may find it tough to extract a high premium for its Czech unit from billionaire Petr Kellner, whose PPF Group NV would have to take steps to halt a multi-year revenue slide at the country’s biggest phone company.

Telefonica said yesterday it was in discussions to sell its 69 percent stake in the fixed-line and wireless carrier to PPF. That’s the only bidder so far, according to people familiar with the matter. The unit’s revenue has fallen every quarter since early 2009 as competition with Vodafone Group Plc and Deutsche Telekom AG’s local businesses intensified. Regulators are now trying to open the market to a new operator with a mobile frequency tender for high-speed 4G services.

Telefonica Czech Republic AS jumped 10 percent this week after Bloomberg News reported that Madrid-based Telefonica is seeking a buyer for the asset. Today, the stock fell as much as 3.1 percent. Trading at a price-to-earnings ratio of 17.5 times, the Prague-based carrier’s valuation compares with 12.6 times on average for eastern European peers, data compiled by Bloomberg showed.

“It’s clear that the market is speculating that the premium won’t be that high,” said Tomas Mencik, an analyst at Cyrrus AS, said in a phone interview. “They would be buying a business that is in a good shape but in a difficult market situation as revenue declines and the auction may bring a new challenger to the market.”

10-Month High

Telefonica Czech fell 10.2 koruna to close at 323.7 koruna in Prague. The stock yesterday reached the highest price since Dec. 5. The company had 5.1 million mobile-phone clients and 1.4 million fixed-access lines at the end of June. It also had 1.4 million wireless users in Slovakia.

An agreement could be announced by early next month, two people familiar with the matter said yesterday. PPF said in a statement that it’s in talks with Telefonica, though it isn’t clear whether the companies will reach a deal.

A Telefonica representative declined to comment. The shares closed 1.3 percent higher at 12.81 euros in Madrid.

A takeover by 49-year-old Kellner, the richest man in the Czech Republic with a net worth of $11.5 billion according to the Bloomberg Billionaires Index, would put the former phone monopoly back in Czech hands for the first time in eight years. If the stake was sold at market price, the $3.9 billion price tag would be less than the $4.7 billion Telefonica paid in two transactions in 2005.

Telefonica Czech’s stock is already trading at a 38 percent premium to its peer group on average, based on multiples of earnings before interest, taxes, depreciation and amortization and including debt, according to Vera Sutedja, an analyst at Erste Group Bank AG in Vienna.

‘Not Overpaying’

The mobile frequency sale and the possibility of higher corporate taxes could lead to further weakness in the company’s performance, a sign that PPF would not pay far over the company’s market price, she said.

“PPF is famous for not overpaying for assets,” Sutedja said in a note, recommending investors sell the stock.

Including debt, Telefonica Czech has an enterprise value that is trading at 5.6 times the company’s projected 2013 Ebitda, according to data compiled by Bloomberg. Two years ago, Polish billionaire Zygmunt Solorz-Zak paid a multiple of 6.4 times for Polkomtel SA, Poland’s second-largest mobile-phone company, in a $5.5 billion transaction.

PPF, one of eastern Europe’s largest investment companies, owns stakes in more than a dozen businesses including electronics retailer Eldorado, gold and silver miner Polymetal International Plc and finance company Home Credit Group.

Vodafone, T-Mobile

Telefonica Czech’s first-half operating income before depreciation and amortization declined 10 percent to 9.14 billion koruna from a year earlier. The Oibda margin shrank to 38.2 percent from 40.5 percent.

During the same period, Deutsche Telekom’s T-Mobile reported a 12 percent decline in adjusted Ebitda to 5.3 billion koruna. T-Mobile, which doesn’t have a fixed-line network, is the largest wireless carrier in the country with 5.7 million customers as of June 30. Vodafone Czech Republic AS had about 3.4 million users.

Telefonica Czech cut its workforce to 5,679 at the end of June, an 11 percent decline from a year earlier, and announced in August it would start talks on a network-sharing deal with T-Mobile for 2014. Now the carriers will probably focus on reversing the decline in sales, said Josef Nemy, an analyst at Prague-based Komercni Banka AS.

“Data is the future revenue provider,” Nemy said. “They still may be able to cut prices, but they can also try to bundle services or engage in more effective marketing to win more customers.”

Auction Rules

PPF said last month it would not take part in the new auction because conditions preclude it from merging with a rival for 15 years. It sold its PPF Mobile Services AS to the unit’s chief executive officer. That company changed its name to Revolution Mobile and applied to take part in the spectrum sale along with the country’s three incumbent operators and Sazka Telecommunications.

PPF could potentially work together with Revolution Mobile to secure part of the spectrum in “a cost efficient way” or disrupt the market and reduce incumbents’ returns, said Dalibor Vavruska, a London-based analyst at Citigroup Inc.

“We think PPF could have a unique opportunity to enter the Czech telecom market at favorable terms, if it were to acquire one of the incumbents,” Vavruska wrote in a note. “The formal separation of PPF and Revolution Mobile allows PPF to freely bid for the incumbents, while Revolution Mobile may serve as a deterrent to other potential bidders.”

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