O2 Germany's IPO boosted by 3-year tax holiday

The prospects for O2 Germany's €1.68 billion initial public offering are being boosted by tax credits that could allow the Telefónica subsidiary to avoid paying taxes over the next three years, according to IPO prospectus documents seen by Bloomberg.

The tax break mostly relates to losses sustained by O2 Germany when it acquired 3G spectrum licences at the beginning of the last decade, and will now enable the company to fully offset taxable earnings through 2015, according to the Bloomberg report.

The documents outline that the tax credits have a net present value of €2.1 billion, or about 21 per cent of the unit's equity value. From 2016 onward the company will experience an effective tax rate of around 12 per cent to 13 per cent, the report said.

"The fact that Telefónica Germany will be able to benefit from not having to pay taxes in coming years makes the asset much more attractive to investors, as the company will be able to use that cash for further investments in the business," Peter Braendle, a fund manager at Zurich-based Swisscanto Asset Management, told Bloomberg.

The IPO documents seen by Bloomberg, which were prepared by one of the banks managing the IPO sale, say that O2 Germany's net income more than doubled to €200 million this year from €71 million a year ago, and could exceed €630 million in 2015.

 Telefónica has confirmed that it plans to offer 23.2 per cent of its German subsidiary at between €5.25 and €6.50 per share, and has told Reuters that no more will be offered once the sale is completed.

"There is no further strategy in terms of them [Telefónica] selling down a minority stake," O2 Germany CFO Rachel Empey told reporters, according to Reuters.  "Germany is the jewel in the crown. It is one of the key businesses. There is no intention to sell further shares," she added.

However, Espirito Santo analyst Will Draper said that proceeds from this IPO together with the recent sale of Telefónica's Atento call centre business are not enough to bring the company close to its target leverage ratio of 2.35 x earnings before EBITDA. "It doesn't really scratch the surface," he said. "Telefónica is going to have to make another significant disposal in the €2 billion to €3 billion range."

For more:
- see this Bloomberg article
- see this Reuters article
- see this separate Reuters article

Related Articles:
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