Convergencia Research, Consultoría especializada en Latinoamérica y Caribe
Tuesday, October 02, 2018

Telefónica would look for a partner and AT&T is on target

The possible sale of Mexico and Central America subsidiaries to lighten the debt of the Spanish company is an appealing issue for the consolidation of the US operator in the region. But it could also be part of a broader negotiation, including an association or participation of AT&T in Telefónica.

As of the end of September, the possibility for Telefónica to divest its shareholdings in Mexico and Central America was raised again. Throughout the region, the media responded to the Mexican newspaper "El Economista", which cites "sources knowledgeable of the situation", according to which the operator has been working for months on the evaluation of these businesses, since they are not strategic for the group.

In June 2016, Convergencialatina announced the possibility for Telefónica to sell assets in the region, with particular attention to what was happening in Mexico. Since then, the version is repeated with some frequency. Especially since the time when José María Álvarez-Pallete took over the leadership of the company and admitted in early 2017 that "we will explore the way to add value to some assets that may be undervalued in the sum of Telefónica's shares, which we believe there are several".

Two years after that, the situation did not change much for the Spanish giant. Beyond the long-term projection of the company – and after the results of the second quarter were known, Pallete said that the objectives and dividend payments set for this year will be guaranteed- the reality is that with a net financial debt that as of June was € 43.593 billion, in the stock exchange more attention is paid to the indebtedness of the company, which is 30% higher than its market capitalization.

Concerns about Telefonica's debt weigh more than the strategic value it can show, such as the laying of fiber optics in Spain or the valuation of the Brazilian subsidiary. The "market bleeding" of Telefonica does not stop, some analysts agree to call it, it has already lost 40% from the maximum of € 10.6 per share reached in March 2017 and ends September with a price around € 6.4 per title. After the restraint of the IPO of subsidiaries such as that of Argentina, where the weight of the economic and financial crisis and an adverse regulatory situation put the investment plans on hold.

Precisely, Argentina was one of the places that could go on sale, along with the subsidiary of Colombia. The Argentine situation makes it unfeasible to think about that possibility. And in Colombia, the local operation faces several complications that makes it less attractive. In the first place, the Colombian justice system ratified in September the ruling by which Telefónica must pay almost € 450 million to the State for the reversion of assets as a result of the revision of mobile telephony contracts. The measure considerably affects the the subsidiary cash flow.

It is also key to consider how the possible exit of the municipality of Medellín impacts on Tigo. It is worth mentioning because weeks ago, the Colombian State announced the sale of its 32.5% stake in Coltel, the company controlled by Telefónica that manages all the Spanish operations in the country. Through Coltel, Telefónica is present in 280 of the 1,122 municipalities in Colombia with fixed broadband, 957 with mobile telephony and 769 with fixed telephony. And an alternative that managed the company's direction was to sell a part or the rest thereof. But also Empresas Públicas de Medellín (EPM) intends to exit the telecommunications business. And 50% of Tigo -Une, which shares with Millicom, is, because of being more dynamic and profitable, more attractive to any potential investor who is looking for opportunities in Colombia.

Mexico is the available market, and necessary to be sold before it continues to lose value. Pallete has publicly acknowledged his dissatisfaction with the poor performance of the Mexican subsidiary. The appointment of Carlos Alberto Morales Paulin, a person very close to Pallete, to direct operations in Mexico, did not yield the expected results in a hostile field. Telefónica continues to lose battle in all areas: it does not grow in mobile telephony (neither in revenues nor in customers) and with a market share of 25%, it sees AT&T growing quarter after quarter. With a market share of 13% in customers, the US company also benefited from the last spectrum tender: it obtained 80 Mhz in the 2.5 GHz band against the 40 Mhz received by Telefónica. AT &T LTE network reached a potential coverage of 100 million people, an objective that the operator meets seven months earlier than promised. In this way, it reached the first goal imposed by announcing in 2015 an investment of US$3 billion in three years.

But in addition, the political change in Mexico can also bring not very good news for Telefónica, if the elected president Andrés Manuel López Obrador fulfills his promise to allow América Móvil to enter the audiovisual market, mastered by Grupo Televisa, both in free to air and Pay TV.

For this reason, and by virtue of AT&T boost to consolidate in Mexico, an eventual offer by the US company for Telefónica's Mexican businesses has already been considered. In the coming weeks, the versions about Telefónica's interest in DirecTV Latin America, which were already commonplace in the last two years and which both companies denied, will also be reconsidered.

Speculative calculations aside, it should be noted that in the last meeting of Telefónica board of directors on December 19 in Madríd, the option of evaluating the entry of a major shareholder to the company was raised, something in which AT&T has already shown interest.

 

 

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