3RD UPDATE: Telefonica Net Profit Up On Latin American Growth

Spanish telecoms giant Telefonica SA (TEF) said Thursday second-quarter net profit rose 16% as revenue growth in its Latin American business compensated for a weaker Spanish market.

Madrid-based Telefonica said net profit rose to EUR2.12 billion, ahead of analysts' forecasts of EUR1.92 billion.

Telefonica's earnings are solid, said ING analyst Georgios Ierodiaconou, especially outside its home Spanish market in Latin America and Europe. He added that organic growth is strong in Latin America and the performance in Brazil and Colombia is especially encouraging given past problems in those markets.

The company's shares reacted well to the results and at 1528 GMT were up 4% at EUR17.70 leading an overall negative Spanish market.

"The results are strong, the market has reacted well to them and Europe was fantastic," Telefonica's head of Europe Matthew Key said in an interview.

Telefonica has been making moves to bulk up its operations outside of its mature Spanish market where it is facing diminishing revenue and stiff low-cost competition.

The company paid EUR7.5 billion Wednesday for a stake in Brazilian cellular company Vivo Participacoes SA (VIV), which it plans to merge with its existing fixed-line company Telesp (TSP).

In a conference call with investors, Telefonica said the Vivo deal would unlock between EUR3.3 billion and EUR3.9 billion in value from operating synergies, an integrated operating model and financial and tax synergies.

Telefonica also said it will launch a EUR800 million tender offer for the remaining 11% free float in Brasilcel that it doesn't already control. Brasilcel is Vivo's holding company that Telefonica and Portugal Telecom SGPS SA (PT) jointly controlled, before Telefonica bought PT's stake.

Telefonica also reiterated its guidance of earnings per share of EUR2.10 in 2010 and a revenue compound annual growth rate of between 1% and 4% until 2012. Telefonica has also promised to pay a dividend of at least EUR1.75 per share in 2012.

Telefonica said operating income before depreciation and amortization rose 4% to EUR5.79 billion in the second quarter, while total revenue increased 9% to EUR15.12 billion.

Revenue in Latin America rose 16% to EUR6.44 billion in the period as the company picked up customers in the region and revenue was boosted by a weaker euro compared to some key Latin American currencies.

Meanwhile in Europe, Telefonica's revenue is under pressure from increased competition as well as the continued fallout from the economic crisis and the impact of regulatory pressure.

Revenue in Spain, where unemployment tops 20% and low-cost competition has increased, fell 3.2% to EUR4.69 billion.

In Europe, where Telefonica operates under the O2 brand outside Spain, revenue increased 14% to EUR3.79 billion as the company's operations picked up steam in the U.K. and Germany.

Telefonica is Europe's second-largest telecommunications company by market capitalization behind Vodafone Group PLC (VOD).

-By Jason Sinclair, Dow Jones Newswires, 34 913958127, jason.sinclair@dowjones.com

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