Telefonica Margins Widen in Spain as Debt-Cut Target Met

Telefonica SA, Spain’s largest phone company, improved profitability in its home market last quarter and said it reached a debt-reduction target earlier than planned after selling assets.

While revenue in its biggest market fell 12 percent to 3.2 billion euros ($4.3 billion), the profit margin widened by 2.8 percentage points from a year earlier to 50.2 percent of sales, the company said today. Net debt is now 44.6 billion euros, below a year-end target for less than 47 billion euros.

Spain exiting a two-year recession last quarter is helping Madrid-based Telefonica hang onto more customers after it introduced bundled voice, data and pay-television offers to fight discounters. Chief Executive Officer Cesar Alierta has sold assets in Ireland and the Czech Republic to cut debt and refocus on larger countries including Brazil and Italy, where he is increasing Telefonica’s influence over Telecom Italia SpA.

“The improvement in margins in Spain is quite remarkable,” Borja Mijangos, an analyst at Interdin Bolsa in Madrid, said by phone. The net debt figure “shows the efforts made by the company to clean up its balance sheet.”

The group’s operating income before depreciation and amortization fell 13 percent to 4.68 billion euros. Analysts projected 4.78 billion euros, the average of estimates compiled by Bloomberg. Sales declined 9.5 percent to 14.1 billion euros, exceeding the 13.9 billion-euro average estimate.

KPN Deal

Telefonica shares climbed 0.8 percent to 12.44 euros in Madrid, bringing the gain to 22 percent in 2013 after three consecutive years of decline. The company has a market value of 56.6 billion euros.

“The shares had a good rally over the past four months due to M&A activity but not really because of an improvement in the business,” Paul Marsch, an analyst at Berenberg Bank in London, who recommends selling the stock. “The company still faces many challenges.”

Telefonica resumed deal-making during the quarter after asset sales helped reduce debt. In July, it agreed with Royal KPN NV to combine their German wireless businesses. Two months later, it agreed to gradually buy out co-investors in Telco SpA, the vehicle that owns 22.4 percent of Telecom Italia and controls its board.

Net debt was 46.1 billion euros at the end of September and has fallen further since the sale of assets such as the Czech and Irish businesses. Net debt has shrunk by almost 14 billion euros since June 2012.

Profit Falls

Net income fell 21 percent to 1.09 billion euros, compared with analysts’ 942 million-euro average estimate.

Oibda from Latin America dropped 17 percent to 2.24 billion euros. Sales fell 6.8 percent to 7.1 billion euros, hurt by exchange-rate fluctuations in Brazil, Argentina and Venezuela. In Brazil, the largest market in the region, Oibda decreased 29 percent to 822 million euros as revenue declined 15 percent.

“I’m not too concerned about Latin America as the growth is stable if you exclude the impact of currencies,” Mijangos of Interdin said.

Telecom Italia said yesterday net income slumped by more than a quarter to 505 million euros as the Milan-based carrier unveiled plans to sell its Argentine business, assets including wireless towers in Italy and Brazil, and a mandatory convertible bond to raise a total of about 4 billion euros.

Telefonica bought 103 million euros of Telecom Italia’s 1.3 billion-euro convertible bond sale yesterday to mitigate a dilution of its indirect stake, the Spanish company’s finance chief Angel Vila said on a webcast conference call today. Telecom Italia’s new strategy is moving in the right direction by strengthening the domestic business and gaining financial flexibility, Vila said.

Deutsche Telecom AG yesterday reported a second consecutive quarter of revenue growth, propelled by a recovery in the U.S. mobile-phone business, while price competition in Europe hurt profitability. Vodafone Group Plc reports Nov. 12.

Before it's here, it's on the Bloomberg Terminal.