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Telefonica (TEF) Gains From Organizational Rejig, Debt Reduction

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Telefonica, S.A. (TEF - Free Report) seems well-positioned, courtesy of its focus on optimized value creation by prioritizing investment in its core operations (Spain, Germany, the U.K., and Brazil). It intends to improve its Hispam operations to streamline the Group structure and core market focus, reduce exposure to emerging markets and foreign exchange volatility, and accelerate deleveraging.

The company’s digital business unit, Telefonica Tech, aims to boost its existing revenue growth streams, making them more visible and increasing optionality. Telefonica’s new operating model is expected to accelerate the digitization of the Group's operations. The company remains on track to meet its 2021 financial targets, which reflects its confidence in long-term growth trends for connectivity and digital services.

Organizational Changes for Seamless Operations

The Spain-based telco giant is currently on a roll. The company has been making necessary organizational changes to boost its operational momentum. Recently, it struck a major milestone with the creation of a new Strategy and Development department. The new-age organizational structure is considered to be a significant move in the company’s business roadmap as it prepares to tap lucrative opportunities offered by the fourth industrial revolution with improved efficiencies while accelerating technological transformation in this dynamic environment.

The Strategy and Development department will lead the technological transformation process and bring together current leaders from Corporate Strategy, M&A, and Digital Innovation units under a single umbrella. Apart from accelerating technological transformation, Telefonica’s Strategy and Development department intends to promote internal efficiencies by capitalizing on big data and artificial intelligence capabilities. With a customer-centric approach, the segment will leverage its strategic vision to promote both organic and inorganic expansion, fueled by the overall growth of the business. This, in turn, will help the unit to generate sustainable profits in the long run.

Also, in one of its landmark moves, the company announced the closing of Liberty Global plc’s Virgin Media and Telefonica U.K.’s largest mobile network O2 mega-merger deal. The 50:50 joint venture, valued at approximately £31.4 billion ($44.4 billion), including debt, is touted as a turning point in the history of the U.K.’s telecommunications industry. The merger is expected to not only mark the launch of a strong mobile competitor in the U.K. market but also generate considerable synergies for Telefonica, with a net present value of £6.2 billion. Telefonica also consolidated three of its global businesses under a single unit — Telefonica Global Solutions. The move is part of its ongoing transformation process to strengthen international businesses. This segmental rejig will speed up operational execution and maximize synergies with greater flexibility.

Debt Reduction Bodes Well

Telefonica divested 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 Telefonica reduce its huge debt burden. 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. The divestment is reportedly the biggest such deal by the company, which expects to book a capital gain of around €3.5 billion, simultaneously trimming its net debt by about €4.6 billion.

Telefonica’s subsidiary, Telefonica Colombia, recently announced its decision to sell off a controlling share in its optic fiber network unit to global investment entity — KKR — for a whopping $500 million. The firms have collaborated to spin off this unit for the creation of an autonomous nationwide open access wholesale fiber-to-the-home network. The new company will be responsible for the deployment of fiber optic network in nearly 90 cities in Colombia while expanding its coverage across 4.3 million homes by 2024. The network gamut, which includes more than half of underserved areas outside high-income urban areas, will be significantly benefited by this rollout.

The sale of the fiber optic network in Colombia is part of Telefonica’s ongoing strategy of deleveraging its balance sheet by selling off its infrastructure assets. The spin-off will enable Telefonica to trim its debt by €200 million. Moreover, Telefonica is apparently considering selling a stake of its Spanish fiber unit. It is currently in talks with potential advisers and expects to bring in new investors. Any agreement could value a standalone fiber business at around 15 billion euros ($17.4 billion) per media reports. Hence, the telco giant is seeking assistance from investors to revive its business units in the pandemic-stricken market.

Wrapping Up

Over the past years, the company has invested heavily in the deployment and transformation of its network to provide seamless connectivity with enhanced capacity, speed, coverage, and security. With operations across 17 countries, Telefonica is capitalizing on the opportunities in the digital world through several growth strategies to enhance long-term prospects while experiencing healthy traction in the smartphone market.

Some prominent players in the broader industry are Otter Tail Corporation (OTTR - Free Report) , California Water Service Group (CWT - Free Report) , and Brookfield Infrastructure Partners L.P. (BIP - Free Report) .

Otter Tail pulled off a trailing four-quarter earnings surprise of 31.8%, on average.

California Water Service pulled off a trailing four-quarter earnings surprise of 15.4%, on average.

Brookfield Infrastructure Partners pulled off a trailing four-quarter earnings surprise of 5.8%, on average.