The Spanish telecom giant
), or Telef, has declared that its desire to turnaround the
company's struggling European operations is progressing as
planned. Additionally, the company is also showing marginal signs
of improvement in the Latin American market.
Telef has been struggling with rising debt amid Spain's
macroeconomic concern. Domestic competition remains a major
concern as the unbundled local loop ("ULL") regulation is forcing
Telef to open its network to alternative providers.
Telefonica Brazil S.A.
) the Brazilian subsidiary of Telef -is facing increased
competition from rival
S.A.B. De C.V.
) and discounted calling plans from the national wireless
The company has one of the highest debt burdens within the
industry and has an outstanding debt of Euro 56 billion ($72
billion). In order to come out of this difficult situation, the
telecom behemoth has stopped paying dividends and is planning a
widespread restructuring to considerably reduce its leverage. The
company raised Euro 1.45 billion ($1.93 billion) by listing its
German unit Telefonica Deutschland.
To revive its financial, the Spanish telecom company has been
disposing off its non-core assets for quite some time now. As
part of that effort, the company recently sold its call centre
arm - Atento to private equity firm Bain Capital for
approximately Euro 1 billion ($1.3 billion). The company also
sold a small stake in
China Unicom Limited
) for Euro 1.13 billion ($1.47 billion) in June 2012.
Furthermore, the company is also planning to offload its stakes
in Portugal Telecom and online booking company Rumbo.
The initiatives taken by the company are yielding positive
results as its customer base and cash flow generation are
improving. At the end of the first nine months of 2012, customer
access reached approximately 308.1 million in Europe,
representing annualized growth of 4.6%. On a consolidated basis,
nine months operating cash flow jumped to Euro 10.1 billion
($12.5 billion) from Euro 7.6 billion ($9.4 billion) in the
We believe offloading non-core assets along with raising
further capital will fulfill the company's plans to raise Euro
7-8 billion ($9-$10.3 billion) every year till 2015, in order to
deal with its mounting debt. Moreover, as the highly competitive
European market is gradually heading towards its saturation
point, the company will require to venture into alternative
markets for future expansion. With a smartphone penetration of as
low as 20% in Latin America provides the best long-term
opportunity for Telef.
Though the company remains bullish on its European revival, we
remain apprehensive that a double-dip Spanish recession along
with a decline in consumer spending in Europe remain the major
concerns for the company and could limit Telef's future success.
We thus maintain a short-term Zacks Rank #5 (Strong Sell) on
AMER MOVIL-ADR (AMX): Free Stock Analysis
CHINA UNICOM (CHU): Free Stock Analysis
TELEFONICA S.A. (TEF): Free Stock Analysis
TELEF BRASIL SA (VIV): Free Stock Analysis
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