Telefonica Braces for More Currency Swings in Latin America

Telefonica SA, Europe’s biggest investor in Latin American telecommunications, forecast currency swings will further weigh on earnings from the region and has boosted capital spending in Venezuela to forestall a possible depreciation.

“We expect the negative impact from currencies to continue, especially in Brazil, which recently had an overshooting,” Finance Chief Angel Vila said in an interview yesterday. In Venezuela, where Telefonica was last able to repatriate cash two years ago, “we are prepared for a potential devaluation.”

Once the growth driver for Madrid-based Telefonica, Latin America has become a less reliable contributor, with the depreciation of the bolivar and declines in the Argentine peso and Brazilian reais helping to shave 7 percentage points off revenue growth in the first nine months. The carrier is hedging to cover two times its so-called free cash flow generated from the region, Vila said in Barcelona, were he is attending an investor conference organized by Morgan Stanley.

Latin America accounts for half of Telefonica’s sales, with Brazil its single largest market after Spain. Telefonica this year shelved a plan to hold an initial public offering for all of its Latin American business, focusing instead on M&A deals in Europe, selling assets in Ireland and the Czech Republic and acquiring control of Royal KPN NV’s German mobile-phone unit.

Venezuela Cash

Telefonica wants to spend as much as possible of an estimated $3 billion that it can’t take out of Venezuela amid speculation of a devaluation of the bolivar, a person familiar with the matter told Bloomberg News in June. The nation devalued the bolivar from 4.3 per dollar to 6.3 on Feb. 8.

In Brazil, Telefonica Brasil SA is the largest wireless operator, competing with Telecom Italia SpA’s Tim Participacoes SA, America Movil SAB and Oi SA. Telefonica, as Telecom Italia’s largest shareholder, favors a sale or a breakup of Tim, people familiar with the matter have said.

“We continue to believe in growth potential in the market,” Vila told investors. “We are proponents and practitioners of in-market consolidation as proven in Germany, Ireland and Czech Republic. These types of deals make a lot of sense, and a deal would make sense in Brazil, but the timing needs to be right for all players.”

Debt Focus

Telefonica shares rose 0.3 percent to 12.16 euros at 9:13 a.m. in Madrid, taking their gains this year to 20 percent. Spain’s biggest phone company has a market value of 55.4 billion euros.

Next year, Telefonica plans to reduce its debt further, and while it will keep “optimizing our allocation of assets,” Telefonica doesn’t contemplate any major disposal yet, Vila said. Telefonica reported net debt of 46.1 billion euros ($62 billion) at the end of September, reaching its year-end target of less than 47 billion euros three months earlier.

As Spain exits a two-year recession, Telefonica executives at the conference said they’re optimistic of a recovery in its home market, where the company is offering bundled voice, data and pay-television services to slow customer defections to discounters.

The level of reforms Spain has done is “amazingly ambitious,” Chief Operating Officer Jose Maria Alvarez-Pallete said in an interview. “This is starting to flow into the economy. Trends are very promising.”

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