Telefonica in Restructure Mode - Analyst Blog
January 17 2013 - 12:10PM
Zacks
The Spanish telecom giant Telefonica S.A.
(TEF), 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.’s (VIV) the Brazilian subsidiary of Telef –is
facing increased competition from rival America
Movil S.A.B. De C.V. (AMX) and discounted
calling plans from the national wireless operators.
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 (CHU) 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 year-ago period.
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 Telef.
AMER MOVIL-ADR (AMX): Free Stock Analysis Report
CHINA UNICOM (CHU): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
TELEF BRASIL SA (VIV): Free Stock Analysis Report
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