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Ace Spanish telecom company Telefonica S.A. (TEF - Analyst Report) announced that its U.K. unit has agreed to dispose its consumer broadband and telephone-line business. For this, the company signed an agreement with the country’s leading pay television company – British Sky Broadcasting Group Plc (Sky).

This deal will fetch Telefonica U.K. nearly £180 million or $270 million. There also exists the clause for an additional payment of a maximum of £20 million or $30 million by Sky. This payment will come into effect after the successful transfer of customers by Telefóonica U.K.

Per the agreement, all broadband and home line telephone customers of Telefonica U.K., totaling over half a million, will be absorbed within the Sky network that had 4.2 million broadband users and 4 million fixed-line subscribers, at Dec 31, 2012.   

Following the acquisition of consumer broadband, home phone and line rental businesses that are managed by the O2 and BE brands, Sky will become the second largest broadband provider in the U.K. market.

The acquisition – which will be financed from the existing cash reserves of Sky – is expected to close by the end of Apr 2013, subject to approvals from regulatory bodies.

Sky management believes that this deal will accelerate the growth of its broadband and telephony segment. The company looks forward to rendering a diversified range of top-quality products, great value along with superior services to a bigger customer base.   

On the other hand, the disposition underlines Telefonica’s aim to say goodbye to U.K. broadband operations and concentrate on enhancing the mobile business unit along with the rollout of 4G connectivity.

Telefonica – that recently entered into a contract with Nokia-Siemens Network, a joint venture between Nokia Corporation (NOK - Analyst Report) and Siemens AG – carries a Zacks Rank #2 (Buy).

We believe Telefonica will be in an advantageous position in the coming months, owing to its business model restructuring, asset rationalization, strong financial flexibility and an improving leverage ratio. However, we remain concerned about weak domestic operations, intense competition from other European players like France Telecom S.A.  , regulatory involvement and higher commercial expenses that will likely limit the upside potetial of the stock.

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