Telefonica Said to Weigh Opening O2 IPO to Individual Investors

  • O2’s 25 million customers present attractive marketing target
  • ‘Good for Telefonica to diversify the shareholder base’

After failing with an initial public offering of its infrastructure unit, Telefonica SA is likely to test investors’ appetite again with the sale of its U.K. mobile-phone business, only this time with a possible twist.

The Spanish phone carrier is considering whether to set aside part of an initial public offering of U.K. mobile operator O2 for individual investors instead of just institutional buyers to broaden the potential customer base for any sale, according to people familiar with the considerations, who spoke on condition of anonymity because the plan is private.

O2 Chief Executive Officer Mark Evans discussed such a sale with the Sunday Telegraph, saying there would be “reasonable demand” from the company’s 25 million customers.

“It would be good for Telefonica to diversify the shareholder base with a public offering,” said Laith Khalaf, a senior analyst at brokerage firm Hargreaves Lansdown. “Additional demand from the public would be good too.”

Telefonica Chairman Jose Maria Alvarez-Pallete has said the company could move ahead with a stock-market flotation of O2 by the end of this year if market conditions are right, though he has yet to give the go-ahead.

Fewer than one in seven IPOs in the U.K. have included shares reserved for retail investors since the 2013 listing of Royal Mail Plc, the country’s former monopoly postal service, according to Hargreaves Lansdown. In those cases, issuers typically set aside about 10 percent to 20 percent of the overall offering for individuals. Brokerage firms typically sell large chunks of stock to institutional investors.

Telefonica referred questions to O2, which declined to comment. The parent company has suffered a series of setbacks in its efforts to cut its 52.6 billion euros ($59 billion) in debt, including regulatory opposition that blocked the sale of O2 to CK Hutchison Holdings Ltd. Telefonica scrapped the planned IPO of its infrastructure unit Telxius on Sept. 29, because of weak investor demand. The business would have been valued at as much as 3.75 billion euros in a sale.

Retail Access

While the public would be interested in buying O2 stock, “I think they will go to the institutions directly, at least initially,” said Naeem Siddique, an investment manager at stockbroker Redmayne Bentley. He expects Telefonica to sell about a 30 percent stake in O2 overall.

The Wealth Management Association, a U.K. lobbying group, urged Telefonica to allocate a significant slice of any O2 offering to individuals. If private investors have to wait to buy shares until they are traded on an exchange, they often end up paying higher prices.

The U.K. has intermittently supported the cause of wider share ownership. In January, then-Chancellor of the Exchequer George Osborne postponed a planned sale of government-owned shares in Lloyds Banking Group Plc to small investors because of market turmoil. U.K. companies that have earmarked shares for individuals in recent IPOs include TSB Banking Group Plc, DFS Furniture Plc and Pets at Home Group Plc.

Analysts said dropping the Telxius IPO could be a prudent move if it boosts prospects for a successful sale of O2, which is potentially far larger. While Telefonica aimed to sell up to 40 percent of Telxius, its unsuccessful deal with Hutchison put a price tag of up to 10.25 billion pounds ($13.3 billion) on O2.

“With O2 on the horizon, Telefonica couldn’t allow itself to fail,” said Javier Mielgo, an analyst at Mirabaud. “Canceling the IPO of Telxius is less of a failure” than an offering that flopped, he added. “With O2 they have far more at stake.”

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