Convergencia Research, Consultoría especializada en Latinoamérica y Caribe
Friday, January 25, 2019

Telefónica was in the center of the scene with its departure from Central America

América Móvil, Liberty, Millicom and AT&T in dance for the operations that the Spanish company seeks to sell in the region to alleviate the weight of its debt.

The sale of Telefónica's operations in Guatemala and El Salvador to América Móvil is just one more step in the restructuring of the Spanish company's business. The operation is in line with the strategy proposed by José María Álvarez-Pallete since he took office and admitted in early 2017 that they would explore "the way to value assets that may be undervalued in the sum of Telefónica's shares, which we believe there are several". This line was reaffirmed during 2018 with various movements, such as the Spanish subsidiary of insurance Antares to Catalana Occidente for € 161 million, 10% of Telxius to Amancio Ortega for € 379 million, startups TokBox and Digital Inc, as well as real estate assets and Torres, businesses for which he obtained more than € 50 million.

If for América Móvil, the purchase implies strengthening its positioning in both countries, for Telefónica it has been a small big business: the total amount of the transaction rises to approximately 9.7 times the estimated OIBDA of the two subsidiaries for 2018.

In absolute terms, just one return, which will be destined to minimally reduce Telefónica's net debt, which reached € 42.636 billion at the end of the third quarter of 2018, which represented a net debt ratio of 2.68 times over OIBDA of the company. Therefore, the focus is on what Telefónica will continue to sell: its data businesses and other operations in Latin America.

According to the Spanish press, Telefónica is already negotiating the sale of its datacenter for US$700 million. The transaction would include the big three ones from Madrid, Miami and Sao Paulo. The American group Digital Reality appears as the main stakeholder. With 195 technology centers in 12 countries, Digital Reality seeks to expand its presence in Latin America. But it will have to bid with the Canadian firm Brookfield, which in 2018 was left with the data business of AT&T for US$1.100 billion, BC Partners, which acquired CenturyLink for US$2.300 billion, and KK, a partner of Telefónica as the owner of the 40% of Telxius.

In Central America, the installed version is that Millicom negotiates to stay with Telefonica's subsidiaries in Costa Rica, Nicaragua and Panama. Costa Rica is the most interesting place due to the decline of the state operator ICE: Movistar Costa Rica went from having 124,000 mobile phone users at the end of 2011 -when the local market was opened- to 2.2 million, a figure greater than 1.7 million of Claro. While ICE continues to prevail with 4.5 million customers, but added only 857,000 new customers since the opening of the market.

However, the latest market movements open several questions. The cancellation of the negotiations to sell the Latin American business to Liberty does not imply that the matter is closed. Although there are also different interests in both players.

For Liberty, the debt level of its Latin American businesses, close to US$ 6 billion, would make it difficult for it to raise the offer for Millicom. A bet on one of the three subsidiaries of Telefonica would be a more measured action and within reach to continue with its regional expansion, after it stayed last year with a majority stake in Cabletica, the operator of which has 25 % of the Costa Rican pay TV market.

In the case of Millicom, the possible exit from the municipality of Medellín in the Colombian subsidiary of Tigo is still in doubt. Although Empresas Públicas de Medellín (EPM) pointed out that the priority is to divest assets in the electricity segment, the remaining 50% of Tigo-Une is more profitable, dynamic and more attractive and more attractive than expanding to other places.

In the last hours also AT&T entered into the game of rumors, after knowing the intention of obtaining up to US$8 billion with the sale of its service of retransmission of Hulu videos and its participation in Sky Mexico, the operator of DTH controlled by Televisa. AT&T reaffirmed that mobile business is the priority in Latin America. Although rather than the Central American offer of Telefónica, the Mexican business of the Spanish company is the most interesting for AT&T. In Mexico, Telefónica does not find a buyer, it was only able to get rid of its fiber optic business and continues to lose ground quarter by quarter.

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