Telefonica’s Brazil Foray Gets Boost From U.K. Sale Proceeds

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Telefonica SA’s effort to expand in Brazil through acquisitions just received a boost as the company stands to get about $15 billion after finding a buyer for its U.K. business.

The proceeds from the sale of O2 to Hutchison Whampoa Ltd. would let the Spanish phone carrier cut debt and take part in deals in Brazil, where it’s strengthening its local unit, said Carlos Winzer, an analyst at Moody’s Investors Service. Moody’s rates Telefonica Baa2, the second-lowest investment grade, with a negative outlook.

Telefonica has been weighing an alliance in Brazil with Oi SA and America Movil SAB for the three to jointly buy Tim Participacoes SA and then split it up, people familiar with the talks have said. Brazil is Telefonica’s second-biggest market and growth in the Latin American country is outpacing Europe.

“Their No. 1 priority is cutting debt and consolidation in Brazil,” said Andres Bolumburu, an analyst at Banco de Sabadell SA with a buy rating on Telefonica stock. “There will be enough for both things because it’s a lot of cash that they will receive.”

Brazilian carriers are seeking to consolidate a market where the pool of potential new users shrinks and billion-dollar network investments, required by regulators, are hurting profit margins. In a sign that deals are heating up, Telefonica agreed to buy Vivendi SA’s broadband unit GVT for 7.69 billion euros ($8.6 billion) last year, beating Telecom Italia SpA.

‘Balancing Act’

Billionaire Li Ka-shing’s Hutchison, owner of the Three carrier in the U.K., and Telefonica said today they started exclusive talks over the sale of O2. The deal is pending due diligence and regulatory approval and probably won’t be completed until 2016.

Telefonica said in early 2014 its net debt would be below 43 billion euros for the year as it strives to maintain its credit rating. In November, the Madrid-based operator said debt was at 45 billion euros. It sought, and failed, to sell 02 in December to BT Group Plc, which instead chose to buy wireless carrier EE.

“Telefonica will need to do a balancing act between deleveraging, capex, M&A and shareholder remuneration,” Winzer said.

Among other options for Telefonica is increasing its stake in its Telefonica Deutschland Holding AG unit by buying Royal KPN NV’s 20.5 percent holding in the German business, analysts at SNS Securities said today in a note. That stake is valued at about 3 billion euros.

More Flexibility

To be sure, there are still multiple hurdles for Telefonica’s Brazilian ambitions. Tim is studying an acquisition of Oi, a deal which could make it more difficult for Telefonica to acquire Tim. Any consolidation in Brazil would also face scrutiny from the country’s regulators.

By taking part in a deal for Tim, controlled by Telecom Italia, Telefonica would strengthen its No. 1 position in the Brazilian wireless market. Tim, with a market value of about $12 billion, is currently the No. 2. America Movil’s Claro SA is the third-biggest carrier, followed by Oi.

Oi is also set to receive funds for potential deals. A shareholder meeting in Lisbon last night removed an obstacle to its sale of Portuguese assets that would generate more than $8 billion in proceeds.

Oi shares rose 8 percent to 7.31 reais at 12:44 p.m. in Sao Paulo. Tim traded 2 percent higher at 12.55 reais. Both companies are based in Rio de Janeiro. Telefonica climbed 3 percent to 13.14 euros in Madrid.

A Telefonica representative declined to comment. In its statement, Telefonica said the O2 sale “improves the financial flexibility” of the company, without giving further details.

In November, Telefonica Chief Financial Officer Angel Vila Boix said the company will be supportive of further Brazil consolidation “if and when it happens.”