Spanish telecom giant
) plans to sell its stake in O2 Germany through public share
offerings. O2 Germany is the company's second largest European unit
after Spain. This unit is valued at about €9 billion.
Additionally, the company is looking to sell some assets in
Latin America through public offering. Latin American operations
include the two largest markets, Mexico and Brazil, which are
healthy contributors to the company's revenue and earnings.
The company did not disclose the specific Latin America assets
it intends to sell. The Latin American operations are estimated at
Telefonica was compelled to plan such moves after Standard and
Poor's downgraded its credit rating last month. The company is also
facing the threat of a Moody's downgrade if its debt position does
not recover. Telefonica operates with a high debt level of €57.1
billion as of March 2012 versus €56.3 billion at the end of 2011
and €55.6 billion at the end of 2010.
According to a Bloomberg report, Telefonica's market share has
plunged about €50 billion over the last 18 months. Telefonica is
underperforming in its home market and woes are getting deeper with
the unresolved Euro-zone crisis.
Additionally, Telefonica 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
America Movil S.A.B. de C.V.
) added to its concerns.
The divestiture of non-core assets is part of the company's
efforts to increase its financial flexibility. Additionally,
Telefonica is restructuring its Colombian business and has
announced the sale of a 13.23% stake in satellite operator Hispasat
The asset-light model is expected to strengthen the company's
balance sheet by trimming its debt. These are expected to result in
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 are maintaining our long-term Neutral rating on Telefonica.
But for the short term (1-3 months), the stock retains a Zacks #4
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