Telefonica to Exit Chinese Assets - Analyst Blog
June 11 2012 - 9:30AM
Zacks
Spanish telecom giant Telefonica S.
A. (TEF) plans to sell almost half (4.56%) of its stake in
China's second largest mobile operator China
Unicom (CHU).
Telefonica will sell 1.1 billion shares for a total of €1.13
billion ($1.4 billion). The transaction, awaiting approval from
antitrust regulators, is expected to complete by the end of next
month. Following the sale, the company will retain a 5.01% stake in
China Unicom.
The divestiture is a part of the company’s efforts to increase
its financial flexibility. 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. In addition, the
company was compelled to plan such a move after Standard and Poor
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.
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.
Apart from divesting its Chinese assets, Telefonica is taking
various efforts to reduce its debt. Late last month, the company
announced its intention to sell its stake in its German unit, O2
Germany, through public share offerings, for €9 billion.
Additionally, the company is looking to sell some assets in Latin
America through public offerings. Latin American operations include
the two largest markets Mexico and Brazil, which are healthy
contributors to the company’s revenue and earnings.
Besides, Telefonica is restructuring its Colombian business and
announced the sale of a 13.23% stake in satellite operator Hispasat
SA in February this year.
We believe this asset-light model would strengthen the company’s
balance sheet by trimming its debt. These would lead to 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.
AMER MOVIL-ADR (AMX): Free Stock Analysis Report
CHINA MOBLE-ADR (CHL): Free Stock Analysis Report
CHINA UNICOM (CHU): Free Stock Analysis Report
FRANCE TELE-ADR (FTE): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
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