Telefonica's Arm Plans IPO

Reportedly, Telefonica S.A. (TEF - Analyst Report) is planning an initial public offering (IPO) of all its Latin American units. The Spanish telecom giant is reported to consider such an action to bring in more cash. The company will likely consolidate its business in Latin America into a holding company and list the shares in the New York Stock Exchange.

Over the last few months, Telefonica has been trimming its high debt level, which was a result of credit-backed expansion strategies. By raising cash via the offering, the company targets to pull down its debt to €50 billion by the end of 2012 from €56 billion recorded at September end.

Telefonica will also opt for other cash-raising methods like scrapping of dividend payment and asset dispositions to reach the desired goal.

Based in Madrid, Spain, Telefonica S.A. provides fixed-line telephone services, wireless communications, Internet access, video and data transmission services, to approximately 309 million customers.

Currently, Telefonica derives more revenues from its Latin American operations than from Europe. The company expects to lead the Brazilian market by expanding its mobile and fixed broadband services as well as expanding its foothold in other regions like Argentina, Peru, Chile and Columbia.

The company announced financial results for the first nine months of 2012 in early November. Both adjusted earnings and revenue for the period dropped year over year. While sales in Europe slid 6.4% year over year to €22.5 billion ($27.8 billion), revenues in Latin America increased 5.9% year over year to €22.6 billion ($27.9 billion).

We believe Telefonica will benefit strongly from the fixed and mobile broadband growth across all markets in the coming quarters. Restructuring, asset rationalization, new digital business, enhancing financial flexibility and an improving leverage ratio is expected to contribute to more revenue and profits for the company.

However, the weak domestic operations, intense competition from major European players such as France Telecom S.A. (FTE - Analyst Report) and Vodafone Group Plc (VOD - Analyst Report) along with regulatory involvement and higher commercial expenses may limit upside potential of the stock. We currently maintain our long-term Neutral recommendation on Telefonica