Telefonica’s Debt-Reduction Plans Slowed by Failed Telxius IPO

  • Telxius sale scrapped after lackluster investor demand
  • Telefonica initially offered stake at $4.2 billion valuation

Telefonica SA’s efforts to reduce its debt pile suffered a new blow after the Spanish carrier was forced to scrap the initial public offering of its infrastructure unit, Telxius Telecom SA, as demand from investors proved inadequate.

Telefonica will continue “to analyze strategic alternatives” for Telxius, the Spanish carrier said in a statement late Thursday. The decision to call off the sale was reached together with the banks that were managing the IPO, the company said.

Telefonica and its advisers had been scrambling to rescue the deal, weighing lowering the price range or reducing the size of the deal amid insufficient demand for the stock, people familiar with the process have said. Telefonica shares fell as much as 4.4 percent on Friday and were down 4 percent at 9.02 euros at 9:09 a.m. in the Spanish capital.

Investors balked at paying the asking price of 12 euros to 15 euros a share and the company and its banks were unable to find a solution. A canceled sale leaves Telefonica, Spain’s most indebted non-financial company, with shrinking options to reduce its 52.6 billion euro ($59 billion) debt pile and sustain its credit rating while still maintaining dividends.

While Telefonica had sought a valuation of as much as 3.75 billion euros for Telxius in a sale of as much as 40 percent of the unit, shareholders struggled to value the company’s submarine-cable assets and pressed for a lower price from such a motivated seller, people familiar with the matter have said.

The parent company has already had to revise its deleveraging plans at least twice this year -- first in May, when European Union regulators blocked the sale of its British mobile-phone unit O2 for as much as 10.25 billion pounds ($13.4 billion). That left Telefonica without the main source of cash it planned to use to pay off debt. The carrier’s Plan B -- selling a stake in O2, possibly in an IPO -- was thrown into turmoil after the value of the pound fell following the U.K.’s June 23 vote to leave the EU.

With Moody’s Corp. threatening to downgrade Telefonica’s debt rating, the company has been focusing on the IPO of Telxius, a unit it created earlier this year with an eye to spinning it off to raise cash.

“Telefonica may now opt to sell Telxius to another company or break off individual assets, such as transatlantic cables, selling them separately from the towers, which are likely to have blurred Texius’ valuation,” Alex Wisch, a Bloomberg Intelligence analyst, said in a note.

Before the EU blocked the O2 deal, Telefonica was counting on lowering one leverage metric, its ratio of net debt to operating income before depreciation and amortization, to 2.35 by the end of 2016. That target has been pushed out by a year, and as of June 30 the leverage figure stood at 3.2.

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