Market Insight

Telefonica to sell Czech and Slovak units

November 05, 2013

James Allison James Allison Principal Analyst, Consumer Devices

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Telefónica will sell 65.9% of Telefónica Czech Republic to PPF Group for EUR2.06 billion (USD2.8 billion), with a further EUR404 million dependant on performance over the next four years. The sale includes Telefónica's interest in Slovakia which is held through its Telefónica Czech Republic. Telefónica Czech Republic and Telefónica Slovakia will continue to use the O2 brand for up to four years, while also joining the Telefónica Partners Programme. Telefónica will keep a stake of 4.9% in Telefónica Czech Republic.

PPF is led by Czech founder Petr Kellner. It was the sole new entrant in the first attempt at the Czech LTE spectrum auction, but declined to follow up its interest in the second attempt to sell LTE licences because the terms of the auction would have prevented it from acquiring an existing mobile operator. Instead, a unit comprised of the management team from that bid, but under new ownership, has entered the LTE auction under the name "Revolution Mobile".

The main driver the Telefónica's divestment of its Czech and Slovak units is Telefónica's desire to reduce its Net Debt. Telefónica's Net Debt stood at EUR53.3 billion at the end of 2012, with the aim of reducing this to less than EUR47 by end-2013. The sale of Telefónica Czech Republic will see Telefónica hit its debt reduction target for 2013. Alongside the sale of Telefónica Czech Republic, Telefónica has sold or reduced its stake in a number of other operations in 2013:

  • Telefónica agreed a deal to sell its mobile operations in Ireland to Hutchison Whampoa for EUR780 million, with EUR70 million dependant on future performance. The deal is currently being reviewed by regulators.
  • Telefónica sold a stake of 40% in its Central American operations-El Salvador, Guatemala, Nicaragua, and Panama-to Corporación Multi Inversiones (CMI) for USD428 million, with 72 million reliant on continued growth.
  • Telefónica sold its fixed-line division in the UK to BSkyB for GBP180 million (USD289 million).
  • In Germany, Telefónica sold its fibre-optic network in Hamburg to Versatel.

Telefónica was more inclined to sell its Czech and Slovak units rather than other European investments because they were viewed as non-core assets despite solid performance, with Telefónica Czech Republic making progress in its key markets: fixed voice subscriptions fell 7.9% year-on-year (y/y) to 1.36 million; fixed-broadband subscriptions grew 2.6% y/y to 896,000; mobile subscriptions grew 2.3% y/y to 5.08 million, and pay-TV customers grew 2.9% y/y to 143,000.

Following the sale Telefónica is left with three majority stakes in Europe: it's domestic market in Spain, which would struggle to attract interest as a standalone business; the UK mobile business which would have limited interest outside of BT or AT&T, and its 76.8% stake in Telefónica Deutschland, which would not be up for further sale as it remains the growth engine of Telefónica's European operations. Telefónica does have valuable operations in South America which would gather interest if made available for sale, but this would significantly inhibit Telefónica's future growth prospects.

As Telefónica has been reducing its exposure to smaller markets, it has been increasing its presence in larger markets, in a change in strategy:

  • In Germany, Telefónica responded to the threat of the combination of Vodafone Germany and Kabel Deutschland by acquiring E-Plus for EUR8.6 billion.
  • In Italy Telefónica plans to increase its shareholding in the investment vehicle that owns 22.4% of Telecom Italia to 70%, with the option to take full control from 1 January 2014.

As a result in the M&A activity in 2013, coupled with the 2012 sales of 30% of Telefónica Deutschland and Atento, Telefónica has come out of the process a much more focused operator with four interests in Europe-Spain, Germany, UK, and a minority stake in Italy-but with a greater emphasis on its investments in South America.

Domestically, the sale of Telefónica Czech Republic will have a limited impact in the near-term through the lack of in-country synergies. As a result, the deal is unlikely to be held up through regulatory approvals. Given the proximity to the LTE spectrum auction due on 11 November, Telefónica Czech Republic, will already have funding for the auction PPF's previous interest in the LTE auction implies that it will be keen for Telefónica Czech Republic to increase its mobile broadband spectrum holdings.

O2 Telefonica
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