By Christopher Bjork
MADRID-- Telefónica SA's retreat from the U.K. market would see
the Spanish telecom giant pivoting further toward South America,
where it is trying to cement its leading position in another
fast-changing market: Brazil.
Telefónica's goal is to become a leaner phone operator focused
on only a handful of large markets while chipping away at a large
debt load the company had saddled itself with over the past
decade.
The Madrid company said on Friday that it was in exclusive talks
to sell O2--the U.K.'s second-largest cellphone operator--for as
much as GBP10.25 billion ($15.5 billion) to rival firm Hutchison
Whampoa, which owns Three, the fourth-biggest operator.
The move would see Telefónica part ways with a business that
brought in almost 14% of the group's revenue in the first nine
months of the year and will leave it more exposed to volatile Latin
American markets, which already bring in more than half of its
sales and profits.
Through deal making, Telefónica has become the leading provider
of cellphone subscriptions in Brazil, while it also controls big
operators in other markets on the continent. While the economies
there are considered more risky, phone and Internet providers are
also growing faster in these less mature markets.
But it also allows the company to address a nagging concern
among investors--a debt load of more than EUR40 billion ($46.2
billion)--which the company said it plans to lower with the
proceeds from the U.K. sale.
Telefónica was in a sticky situation in the U.K.
Rivals have started to offer consumers packages of high-speed
Internet, cellphone connections and digital television, leaving
Telefónica's cell phone-only offering lacking. One option, which
the Spanish company also had considered, was to seek an alliance
with a company that could give it access to TV and broadband.
Telefónica in recent weeks met Sky PLC to discuss ways of
cooperating, people familiar with the matter said.
The other option was to sell.
Investors applauded Friday's announcement and sent Telefónica's
stock up more than 3% in afternoon trading in Madrid.
"We think a complete exit from the U.K. in an all-cash
transaction is the best option for Telefónica," said Javier
Borrachero, an analyst with Kepler Cheuvreux in Madrid. Mr.
Borrachero said the sale would move Telefónica's debt levels down
to where the rest of the sector is, as well as allow the company to
keep paying a generous dividend.
Analysts at Citigroup said the debt reduction the potential deal
brings makes Telefónica's turnaround process "more credible." It
said the alternative for the former Spanish phone monopoly would
have been either to cut its dividend or raise cash through a
capital increase.
Telefónica bought O2, which included assets in Germany and
Ireland, in 2005 for GBP17.7 billion. It has sold off chunks of the
business over the past two years to pay down debts and fund
acquisitions in Brazil and Germany. Hutchison bought the company's
Irish assets and Telefónica has also sold part of its German unit
in a public offering. All in all, the investment has been a
profitable one for Telefónica, said people within the company.
The U.K. divestment comes as Telefónica is doubling down in
Brazil, which already is the largest contributor to its earnings.
The phone giant last year cemented its position as the dominant
telecommunications firm in Latin America's biggest economy with a
EUR7.24 billion takeover of broadband and cellphone operator
GVT.
But cash from the sale of O2 may also come in handy over the
coming year as consolidation in Brazil continues. Analysts expect
the number of Brazilian cellphone operators to shrink further, from
four to three, with Telefónica playing a role.
Two smaller rivals, Brazilian phone operator Oi SA and the local
unit of Telecom Italia, TIM Participações, have both signaled an
intention to make a bid for each other's operations, and Oi
recently discussed joining forces with Telefónica and the fourth
operator, Mexico's América Móvil SAB, to make a joint offer for
TIM.
HSBC and Moelis are advising Hutchinson on the acquisition. UBS
is advising Telefónica.
Write to Christopher Bjork at christopher.bjork@wsj.com
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