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Telefonica Suffers a Major Setback, Scraps Telxius IPO

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Spanish telecom behemoth Telefonica SA (TEF - Free Report) recently suffered a serious jolt as it was forced to abandon its plan to conduct an IPO (initial public offering) for its infrastructure division Telxius. Just a couple of weeks ago, Telefonica had filed an IPO prospectus with the Spanish stock market regulator, the Comisión Nacional del Mercado de Valores (CNMV). The company set an indicative price range of €12--€15 per share of Telxius. However, it witnessed strikingly weak demand from investors.

Telefonica had decided to sell a 36.36% stake in Telxius comprising 90.9 million shares. The figure may go up to 40% if the market response was strong. This implies gross proceeds of €1.09-1.36 billion for Telefonica which may go up to € 1.48 billion if the company sells 40% stake of Telxius. Consequently, the infrastructure division will be valued at a range of €3–€3.75 billion. Nevertheless, the market lacks enthusiasm at this price level.

Notably, in May 2016, Bloomberg reports stated that Telefonica is mulling over an IPO for Telxius and O2 wireless division in the U.K. In the meantime, the company has been grappling with issues such as the Brexit, Britain’s vote to leave the European Union, which delayed the process. Initially, Telefonica was looking for gross proceeds of €4–€5 billion from the IPO of its infrastructure division.

According to Bloomberg, the reason for lower valuation is the investors’ concern regarding the proper method to value the submarine cable assets of Telxius. At present, the division oversees about 16,000 wireless towers and an international submarine-cable network covering 31,000 kilometers (19,000 miles). More assets are likely to be assigned to the unit over time. In 2015, around 60% of the division’s revenues and EBITDA came from submarine-cable network. At the end of Jun 2016, Telxius had an order backlog worth €4.7 billion.

The Telxius IPO was of utmost importance to Telefonica after the European Union telecom regulator blocked the proposed sale of its O2 unit in the U.K. to 3UK of Hutchison Whampoa. The deal was worth around $14.9 billion. Telefonica’s debt currently stands at approximately €52.6 billion (around $59 billion). The company had planned to reduce its debt burden through the divestment of its O2 division. However, the plan fell through as the transaction failed to materialize. Telefonica is now reportedly planning an IPO for its O2 division also.

The spin-off of an infrastructure unit is not new in the global telecom space. Earlier, America Movil SAB (AMX - Free Report) had spun-off its Telesite infrastructure division and Telecom Italia SpA (TI - Free Report) also followed suit. As of Jun 30, 2016, total customer access lines of Telefonica were approximately 341.9223 million, down 1.8% year over year. Notably, in the Latin American markets, Telefonica competes with large global telecom operators like AT&T Inc. (T - Free Report) and America Movil.

According to some industry watchers, Telefonica may now be compelled to vend some of its core assets in order to raise cash and pay-off debt. Otherwise its debt rating may be badly affected. Nevertheless, management expects free cash flow and operating income before depreciation and amortization to be higher in 2017 than in 2016. At this juncture, cancellation of the Telxius IPO is a major blow to Telefonica in its effort to clear part of its gigantic outstanding debt.

Telefonica currently carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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