Reuters: Mergers News: Telefonica makes most of weak hand with German IPO plan

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Telefonica makes most of weak hand with German IPO plan May 31st 2012, 17:02 Thu May 31, 2012 1:02pm EDT * Spanish telco moves to protect credit rating amid debt crisis * IPO of German arm raises hopes of consolidation with KPN * Move adds twist to America Movil raid on KPN By Leila Abboud PARIS, May 31 (Reuters) - Telefonica is making the most of a bad hand with plans to list its German arm, taking a much-needed step to cut its debts while raising the chances of a deal to prevent Carlos Slim's America Movil from invading its European turf. Spurred by threats to its prized investment grade credit rating, the Spanish telecoms group announced measures late on Wednesday to accelerate assets sales, list units, and cut the cash portion of its dividend by 69 percent. The moves pleased credit analysts and investors who sent Telefonica's shares, which have been at nine-year lows, up as much as 3 percent in early Thursday trading. They were also greeted with cautious optimism in the Netherlands where telecoms group KPN is trying to fend off an unsolicited partial tender offer by Mexican billionaire Carlos Slim's America Movil, which it sees as undervalued. KPN is weighing asset sales including its German unit E-Plus, which has long been mooted as a merger candidate with Telefonica's O2 Germany, to prove to its shareholders that they would should reject Slim's offer of 8 euros per share for 27.7 percent of the company. Despite the logic of combining Germany's two smallest mobile players and the sizeable synergies that could be created, Telefonica's debt burden has meant a cash deal would be very difficult any time soon. By seeking to list O2 Germany, Telefonica gains a currency - the equity of the newly listed vehicle - to pay for such a deal without taking on more debt. That could raise hopes at KPN of a tie-up that could allow it resist the offer from Slim, who is believed to be keen on keeping Germany as a beachhead into Europe. "I see this as a positive for KPN because it provides capital for Telefonica, raising its firepower dramatically, and gives them a liquid currency in Germany," said a person familiar with the situation. "To a KPN shareholder I would say the listing of Telefonica in Germany increases the feasibility of consolidation," the person said. "So they shouldn't accept the tender from America Movil, which could seek to block a sale via its minority stake." Espirito Santo analyst Nuno Matias said Telefonica had handled a bad situation deftly: "They have pleased the rating agencies yet left the door open to going after the E-Plus asset at some point." Shares KPN fell as much as 1 percent as some investors fretted the move could upset Slim's plans. "AMX offers a certain premium now while upside from German consolidation is tentative, not least on regulatory hurdles," telecoms analysts at Jefferies wrote in a note. KPN shareholders have until June 27 to decide whether to tender their shares. REDUCING LEVERAGE Telefonica needs to raise 7-8 billion euros a year through 2015 to cope with debt maturities and is also struggling with sinking revenue and profits in its home market of Spain, where one in four is unemployed and the banking industry is in crisis, pushing the state's cost of borrowing higher. Standard & Poor's downgraded the company's debt to 'BBB' on May 24, citing intense pressure in Spain, and Moody's placed Telefonica on review for downgrade. Carlos Winzer, credit analyst at Moody's, said the agency would continue its review process on Telefonica and welcomed the debt-cutting measures. "Any company domiciled in Spain that has big refinancing needs - even a blue-chip like Telefonica - needs to be very careful right now," said Winzer. "Telefonica has done a good job on refinancing so far: they have already refinanced all this year's debt and 40 percent of next year's, but there is still some to do for 2013 and beyond." GERMAN CONSOLIDATION Telefonica has not yet mandated banks to prepare the initial public offering (IPO) of its German business, according to three financial sector sources. Nor is it clear how large a stake Telefonica will seek to list. Analysts predict the group could unload 30-40 percent of it. Germany is Telefonica's second-largest European market with 25 million customers after Spain, and it brings in about 7 percent of group operating profit. Although it is the smallest operator in Germany behind Vodafone, Deutsche Telekom, and KPN's E-Plus, the business has good prospects with revenues and profits increasing, analysts said. Deutsche Bank values 02 Germany at 9.8 billion euros, while Espirito Santo sees it at 7.8 billion euros. With Europe's telecom shares near ten-year lows, it's not an ideal time for a listing, although Russian telecom group Megafon aims for one later this year. Few IPOs have been done in Europe this year, with proceeds tumbling 79 percent year-on-year, because of the long-running euro zone crisis and volatile stock markets. One equity capital markets banker said it was impossible to predict what the IPO markets would be like later this year. "If, and it is a big if, Europe sorts its mess out then anything is going to be doable because then it is all going to be about a relief rally and just getting liquidity and size," the banker said. Elsewhere, Telefonica's probable candidates for listing in Latin America would be Mexico, Colombia, Chile and Peru, a Telefonica source said. Since its Brazilian unit is already publicly traded in Sao Paolo, analysts say one option would be to add assets to that vehicle. Robin Bienenstock, analyst at Bernstein Research, said Telefonica stood to benefit even if the IPOs didn't pan out. "Telefonica has killed three birds with one stone," he said. It makes clear its intention to reduce debt, leaves options open in Germany, and gains a stronger hand in negotiations for planned 1.5 billion euros in non-core asset sales because it "appears to have options" and seems less of a distressed seller. "Get set for an exciting month in telcoland. Last night's announcement by Telefonica tells us that there may yet be a few twists and turns before Mr. Slim's America Movil get their hands on KPN," she added. Link this Share this Digg this Email Reprints

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