Telefonica Going Asset Light - Analyst Blog


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Spanish telecom giant Telefonica S. A. ( TEF ) 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 €40 billion.

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. ( FTE ), Vodafone Group Plc ( VOD ), China Mobile Ltd. ( CHL ) and America Movil S.A.B. de C.V. ( AMX ) 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 SA.

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 (Sell) Rank.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
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