Telefonica Said to Lean Toward Keeping O2 After Failed Sale

  • Carrier sees benefit in holding on to profit-generating unit
  • Company looking for other ways to raise cash to reduce debt

Telefonica SA is leaning toward holding on to its British O2 unit rather than seek another buyer after a plan to sell the U.K. wireless carrier was blocked by European Union regulators, according to a person with direct knowledge of the matter.

While Telefonica’s priority is to reduce leverage, the company is better off with O2 in its portfolio than without it, said the person, who asked not to be identified discussing internal company deliberations. The company will continue to seek ways to raise cash and reduce its debt pile, the second-highest among European phone operators, said the person. The person didn’t say whether the company will pursue a partial sale of O2’s stock through an initial public offering.

The European Union blocked Telefonica’s 10.3 billion pound ($15.1 billion) sale of O2 to CK Hutchison Holdings Ltd. this month on concern that the deal would reduce competition and increase prices. Telefonica had planned to use the proceeds to reduce its 50.2 billion euros ($56.6 billion) in debt as it seeks to maintain its credit ratings. Telefonica has said it has other options for O2, including the IPO or a sale to another party.

An IPO would allow Telefonica to raise cash while still maintaining control of the business. Other ways for Telefonica to raise cash include a planned IPO of its infrastructure unit Telxius.

A Telefonica press officer declined to comment. Telefonica’s shares declined as much as 1 percent and traded 0.3 percent lower to 9.53 euros at the close in Madrid.

Before the EU blocked the O2 deal earlier this month, Chairman Jose Maria Alvarez-Pallete said that if Telefonica kept O2 and continued to receive earnings from the unit, it wouldn’t need to raise as much as it originally aimed for when it agreed to sell.

Still, Moody’s cut its outlook on Telefonica’s debt to negative from stable on May 12, citing expectations that the EU decision will delay the carrier’s attempt to reduce borrowings. Five days later, S&P Global Ratings cut its outlook to stable from positive.

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