In a bid to lower the debt level, Spanish telecom giant
Telefonica S. A.
) has planned to divest its call center business, Atento, to
privately-held Bain Capital for €1 billion ($1.3 billion). The deal
value includes a deferred payment of €110 million ($142.7 million)
plus a vendor financing of €110 million.
The deal, awaiting regulatory approvals, is expected to complete by
the end of this year. Telefonica will remain Atento's service
provider for nine years.
The divestiture is a part of the company's efforts to increase its
financial flexibility. As of June 2012, Telefonica had a high debt
level of €58.31 billion, above €56.3 billion at the end of 2011 and
€55.6 billion at the end of 2010. In addition, the company was
compelled to plan such a move as it needed to retain its
investment-grade credit rating from Moody's, after the recent
downgrade by Standard and Poor's.
Additionally, Telefonica is struggling hard and underperforming in
its home market as the lingering Euro-zone debt crisis is
intensifying the headwinds. The company is exposed to increased
churn rates (customer switch) and lower Spanish revenue due to the
ongoing reduction in MTRs, which is the fee that operators charge
each other to connect calls.
Further, growing competition from
France Telecom S.A.
Vodafone Group Plc
China Mobile Ltd.
America Movil S.A.B. de C.V.
) added to its concerns.
Apart from divesting its call center business, Telefonica is taking
various efforts to reduce its debt. Earlier this month, the company
had announced plans to sell its stake in its German unit, O2
Germany, through IPO. Additionally, the company is looking to sell
some assets in Latin America through public offerings. Latin
American operations include the two largest markets - Mexico and
Brazil, which are healthy contributors to the company's revenue and
Moreover, Telefonica is restructuring its Colombian business. The
company sold 13.23% stake in Hispasat in March and 4.56% of its
stake in China Unicom for €1.13 billion ($1.4 billion) in July.
We believe this asset-light model would strengthen the company's
balance sheet by trimming its debt. These would lead to a €1.5
billion debt reduction this year, which will be 2.35 times of OIBDA
compared with 2.63 times at the end of 2011. Such actions will also
help in winning back investor confidence and would uplift
shareholder returns in the future.
We currently have our long-term Underperform recommendation on
Telefonica. For the short term (1-3 months), the stock retains a
Zacks #5 (Strong Sell).
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