Telefonica has announced plans to pursue an IPO of its German unit, as part of efforts to reduce its debt. The economic turmoil in Spain is making it more difficult for the operator to manage its debts, and its operational performance in Spain continues to suffer. With a stock listing for the German unit, Telefonica opens a new avenue for financing investments, but this will only be a small step in solving its bigger financial problems.
The German operations are Telefonica's third biggest market in Europe, after Spain and the UK, with just over EUR 5 billion in revenues last year. O2 remains the smallest of the four mobile operators in Germany, and Telefonica also has some 2.5 million customers in the fixed broadband market, a crowded arena with tough competition from the incumbent and cable operators.
Rumours regularly surface of a possible merger of O2 with the number-three mobile player, KPN's E-Plus, as a way to fight market leaders Vodafone and Deutsche Telekom. However, neither KPN nor Telefonica has proven willing to sell, due to an inability to agree on price. A deal with E-Plus could be closer now that Telefonica is under pressure to monetise its assets. Furthermore, if America Movil, Telefonica's biggest rival in Latin America, succeeds in its bid to take a large stake in KPN, it may put pressure on the Dutch operator to make a knock-out bid for O2 Germany.
KPN has its own reasons for considering a takeover of O2. Its results are under pressure in the Netherlands, and Germany has been one of the few growth areas for the company. A merger with O2 could also solve E-Plus' spectrum problems in Germany, after it missed out on acquiring frequencies in the 800MHz band, needed for LTE coverage in outlying areas. German regulators have also signaled they may start the process to redistribute GSM frequencies next year, before current licences expire in 2016. This may create an opportunity for E-Plus, but it could also mean all the operators face billions more in spectrum fees.
Telefonica may still be reluctant to sell. After all, it has held on to worse-performing assets, such as its stake in Telecom Italia. Germany remains a growth market for the company, and an IPO could provide it with a means of financing some of the needed investment in the country, while still keeping control of the asset. Germany is also the easiest place to hold an IPO at the moment, as investors continue to view the country as a safe haven. The Spanish operator was forced last year to abandon an IPO in Spain of its call centre unit Atento.
In addition to the German IPO, Telefonica is considering listing some of its Latin American operations and selling other non-core assets. The aim is to reduce its net debt-to-EBITDA ratio to 2.35 this year, from a reported 2.55 at the end of March. With its credit ratings already under review for further downgrades and no signs of improvement in the economy, the Spanish operator will need to act quickly to meet the target.
