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Telefonica (TEF) Divests Non-Core Assets to Reduce Debt

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Telefónica, S.A. (TEF - Free Report) recently announced that it has inked a definitive agreement to divest its non-core mobile phone masts in Europe and Latin America to U.S.-based telecom infrastructure operator American Tower Corporation. The transaction, worth €7.7 billion euros ($9.41 billion) in cash, is likely to help the company reduce its huge debt burden. The news seemed to have hit the right chords with investors as share price of the company jumped 9.2% in aftermarket trading to $4.85.

Per the deal, Telefonica is selling 30,700 tower sites across Spain, Germany, Brazil, Peru, Chile and Argentina as it seeks to de-lever its balance sheet. At a time when most European firms are aiming to consolidate their position in the market for aggressive 5G rollouts, the company is taking a seemingly divergent path in a concerted effort to improve its liquidity.

The divestment is reportedly the biggest such deal by the Spanish company, which expects to book a capital gain of around €3.5 billion, simultaneously trimming its net debt by about €4.6 billion. The deal further enables American Tower to gain a foothold in Germany as it aims to snap up full ownership of telecommunication towers across the globe. This, in turn, is likely to enable it to maximize revenues by leasing mast space to several network operators.

Telefonica has a debt-laden balance sheet. As of Sep 30, 2020, the company had $10,699 million in cash and cash equivalents with $50,100 million of long-term debt. Although the company is striving to bring down debt through modified financial strategies, accumulating debt may pose problem for its credit ratings.

Notably, Telefonica is experiencing a significant impact from the COVID-19 pandemic, with pressure across the Group’s markets in both its B2C and B2B segments. The pandemic has contributed to significant depreciation of Latin American currencies versus the euro. Telefonica has classified its operations across Latin America (excluding Brazil) as non-core, given the challenging market conditions across these markets and their declining contribution to revenues and profitability in recent years.

Telefonica has restructured its Latin American business while remaining focused in other key European markets and the United States. With a major upheaval in eight Latin American markets, the company aims to “reinvent” itself amid a challenging macroeconomic environment. The radical restructuring process is likely to feature an “operational spin-off”, whereby the company has created two separate business entities, namely Telefonica Tech and Telefonica Infra. With the creation of the new units for digital technology and infrastructure assets, Telefonica expects to generate additional revenues of more than €2 billion a year by 2022. Further, the Group is exploring network sharing agreements to reduce capital intensity and optimize investment.

Shares of the company have lost 34.1% in the past year compared with the industry’s decline of 8%.



Telefonica currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Telenor ASA (TELNY - Free Report) , Chunghwa Telecom Co., Ltd. (CHT - Free Report) and Cincinnati Bell Inc. (CBB - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Telenor has a long-term earnings growth expectation of 27.9%.

Chunghwa has a long-term earnings growth expectation of 1.4%.

Cincinnati Bell delivered a positive earnings surprise of 18%, on average, in the trailing four quarters.

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