Telefonica back in shape to clear debt hurdles

Wed Feb 20, 2013 11:11am EST
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By Clare Kane and Josie Cox

MADRID/LONDON (Reuters) - Spanish telecoms company Telefonica (TEF.MC: Quote) is off life support after a year of asset disposals and cash-saving moves and now must focus on repairing its domestic business, boosting its revenues and rebuilding profits.

Eight months ago it was weighed down with 58 billion euros ($78 billion) of debt threatening its investment grade credit rating, having built up larger debts than its peers by taking advantage of the credit boom in Spain a decade ago to fund a huge expansion into Latin America, where it operates in over a dozen countries.

But since last summer it has sold down its stake in China Unicom (0762.HK: Quote) for 1.1 billion euros and exchanged 800 million euros of preference share debt for equity. It also scrapped its dividend of 150 euro cents a share intended for 2012 and a share buyback program to save 6.8 billion euros. It also raised 1.45 billion from floating its German O2-branded unit (O2Dn.DE: Quote).

As a result Telefonica is expected to say in 2012 results on February 28 that it has now got its ratio of net debt to earnings before interest, tax, depreciation and amortization (EBITDA) down to 2.35, from 2.65 at the end of June, credit analysts said.

That would protect its credit rating and could mean Telefonica will not have to spin off its Latin American arm with an $8 billion share offer as once expected, or follow rivals with other cash-raising measures.

Dutch group KPN (KPN.AS: Quote) earlier this month launched a 3 billion-euro share offer and 1 billion-euro hybrid capital issue while Telecom Italia (TLIT.MI: Quote) is also planning on issuing hybrid debt to help fund infrastructure spending.

The main challenge for Telefonica now is to repair its all-important Spanish business, which lost over 3 million mobile customers last year, with the company now trying to win back business by bundling internet, television, mobile and fixed line services under its Movistar Fusion brand.

But credit analysts say even without immediate growth in EBITDA it could protect its debt/EBITDA ratio by continuing to hold back on its once hefty dividend payments.   Continued...

Workers rest sitting next to Telefonica's tower entrance in Barcelona January 30, 2013. REUTERS/Albert Gea