Telefónica is looking to cut its huge debt mountain with an initial public offering of its O2 Germany unit and some of its Latin America operations.
The company, which is struggling under net financial debts of €57 billion, is being forced to take drastic action given that it needs to raise €7 to €8 billion a year through 2015 to cope with debt maturities while suffering from declining revenue and profits in its domestic market, according to Reuters.
Telefónica's decision to quickly raise cash comes after it failed last year to spin off its Atento call-centre unit after not attracting enough interest, seeing its market value slump by $60 billion in 18 months, and then having Standard & Poor's downgrading of the company's debt to BBB.
Reaction from industry analysts to the announcement was largely negative with investor confidence in new IPOs at a low as turbulence in Europe's financial markets worsens. Will Draper, an analyst at Espirito Santo, told the Financial Times: "It is going to be very hard to spin off anything in these markets at sensible valuations."
Other analysts agreed the operator would face difficulties with any potential IPOs. "Telefónica's decision comes way too late as it wants to sell assets at an all-time low when it could have done it much earlier," Robin Bienenstock, an analyst at Sanford C. Bernstein in London, told Bloomberg. "You now have corporate uncertainty on top of the whole euro-crisis."
Taking a more neutral view, Francisco Salvador, a Madrid-based strategist at FGA/MG Valores, told Bloomberg: "Germany is Telefónica's crown jewel in Europe so this could be a positive move. No doubt investors will be more willing to pay a premium for assets in Germany or Latin America rather than the U.K. or Spain."
The company has not detailed what Latin American assets it might sell or list, and the company declined to comment on valuation or a timetable for the O2 Germany IPO.
However, Macquarie Securities values the O2 subsidiary at around €7 billion, while Espirito Santo said the unit may be worth as much as €8 billion to €9 billion. Telefónica acquired the O2 Group for $31.5 billion (€25.5 billion) in 2006 to add mobile units in the UK, Ireland and Germany in the company's biggest acquisition.
This unexpected move by Telefónica to sell assets would seem to have shattered any suggestion that the company could make a bid for KPN's German E-Plus mobile unit. However, a listing of O2 Germany could trigger consolidation between the third and fourth ranked operators in Germany.
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