Spanish telecom giant Telefonica S. A. (TEF - Free Report) plans to launch initial public offering (IPO) of Telefonica Deutschland, currently operating as O2 in Germany, by the end of the year.
Though Telefonica has not yet decided on the proportion of the holdings eligible for IPO, it intends to hold the majority of the holdings with itself. The shares would be listed on the Frankfurt stock exchange.
The company was compelled to plan such a move to retain its investment-grade credit rating from Moody, after the recent downgrade by Standard and Poor’s. As of June 2012, Telefonica had a high debt level of €58.31 billion, above €56.3 billion at the end of 2011 and €55.6 billion at the end of 2010.
Further, Telefonica is struggling hard and underperforming in its home market as the lingering Euro-zone crisis is intensifying the headwinds. Additionally, the company is exposed to increased churn rates (customer switch) and lower Spanish revenue due to the ongoing reduction in MTRs, which is the fee that operators charge each other to connect calls.
In Germany, O2 is the smallest mobile operator with roughly 16.4% of subscribers, trailing KPN's E-Plus, Deutsche Telekom (DTEGY - Free Report) and Vodafone Group Plc (VOD - Free Report) . It is growing rapidly even amidst the intensifying European problems. The unit profit more than doubled to €55 million in the first half of the year on the back of rising subscribers count and cost-cutting measures.
Further, the move is the larger part of the company’s restructuring plan to sell its assets to enhance the overall financial flexibility. The company sold 13.23% stake in Hispasat in March and 4.56% of its stake in China Unicom for €1.13 billion ($1.4 billion) in July.
The asset-light model is expected to strengthen the company’s balance sheet by trimming its debt. These are expected to result in a €1.5 billion debt reduction this year, which will be 2.35 times of OIBDA compared with 2.63 times at the end of 2011.
Such actions will also help in winning back investor confidence and would uplift shareholder returns in the future. Over the last seven years, Telefonica has progressively increased its dividend per share, returning almost €40 billion to shareholders. The company distributed €2.8 billion in cash dividends in the first half of the year.
However, Telefonica suspended its dividend payments for the time being and expects it to resume in the fourth quarter of next year at €0.75 per share. In fact, the company promised to distribute €500 million in dividends next year and expects sufficient increase in future years in order to attract investors for IPO bidding.
We currently have a long-term Underperform rating on Telefonica. For the short term (1–3 months), the stock retains a Zacks #5 (Strong Sell) Rank.