Spanish telecom giant Telefonica S. A. ( TEF )
plans to launch initial public offering (IPO) of Telefonica
Deutschland, currently operating as O2 in Germany, by the end of
Though Telefonica has not yet decided on the proportion of the
holdings eligible for IPO, it intends to hold the majority of the
holdings with itself. The shares would be listed on the Frankfurt
The company was compelled to plan such a move to retain its
investment-grade credit rating from Moody, after the recent
downgrade by Standard and Poor's. 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.
Further, Telefonica is struggling hard and underperforming in its
home market as the lingering Euro-zone crisis is intensifying the
headwinds. Additionally, 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.
In Germany, O2 is the smallest mobile operator with roughly 16.4%
of subscribers, trailing KPN's E-Plus, Deutsche
) and Vodafone Group Plc
). It is growing rapidly even amidst the intensifying European
problems. The unit profit more than doubled to €55 million in the
first half of the year on the back of rising subscribers count and
Further, the move is the larger part of the company's
restructuring plan to sell its assets to enhance the overall
financial flexibility. 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.
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. Over the last
seven years, Telefonica has progressively increased its dividend
per share, returning almost €40 billion to shareholders. The
company distributed €2.8 billion in cash dividends in the first
half of the year.
However, Telefonica suspended its dividend payments for the time
being and expects it to resume in the fourth quarter of next year
at €0.75 per share. In fact, the company promised to distribute
€500 million in dividends next year and expects sufficient increase
in future years in order to attract investors for IPO
We currently have a long-term Underperform rating on Telefonica.
For the short term (1-3 months), the stock retains a Zacks #5
(Strong Sell) Rank.
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