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Spanish Telecom giant Telefonica S.A. (TEF - Analyst Report) has divested its call centre arm – Atento to a private equity firm Bain Capital for approximately Euro 1.3 billion. Offloading its customer care operations is part of the company’s strategy to raise capital through asset sales.

Per the deal, Telefonica will provide Euro 110 million for vendor financing which translates into a net asset disposal value of less than Euro 1 billion. However, Atento will continue to provide customer service to Telefonica group for the coming nine years.

Atento, which employs around 152,000 people, is the second largest customer relationship management company in the world garnering more than 50% of its revenue from Telefonica. The company’s 2011 revenues stood at Euro $1.8 billion and had a net debt of Euro 175 million.

Madrid-based Telefonica has been struggling with rising debt amid Spain’s macroeconomic concern. The company has one of the highest debt burdens within the industry and has an outstanding debt of Euro 57 billion. Any further sovereign downgrade could affect Telefonica’s rating, which can impact its borrowing cost as a consequence.

Telefonica has been disposing off its non core assets for quite some time now. As part of that effort, the company has been looking to get rid of its customer relationship unit since 2007, which included an unsuccessful attempt to float Atento last year. The company also sold a small stake at China Unicom Limited (CHU - Analyst Report) for Euro 1.13 billion in June 2012. Furthermore, the company is also planning to offload its stakes in Portugal Telecom and online booking company Rumbo. 

The company has also stopped paying dividends and is planning a widespread restructuring to considerably reduce its leverage. Telefonica is mulling an IPO option for its German unit and plans to raise $1.5 billion from the issue. We believe offloading non core assets along with the capital raising plan will fulfill the company’s plans to raise Euro 7-8 billion every year till 2015 in order to deal with its mounting debt.

On the flip side, a double dip recession along with a decline in consumer spending, remain the major concerns for the company. We believe Spain’s ongoing economic concern could seriously limit Telefonica’s ability to reduce its mounting debt.

We maintain our long-term Neutral recommendation on Telefonica. However, it has a Zacks #4 Rank, implying a short-term Sell rating on the stock.

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