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Telefonica (TEF) Initiates Telxius IPO Amidst Difficulties


Spanish telecom behemoth Telefonica SA TEF recently filed an IPO (initial public offering) prospectus for its infrastructure division Telxius, to the Spanish stock market regulator, the Comisión Nacional del Mercado de Valores (CNMV). In May 2016, Bloomberg reports stated that Telefonica is mulling over an IPO for Telxius and O2 wireless division in the UK. In the meantime, the company has been grappling with issues such as the Brexit, Britain’s vote to leave the European Union, which delayed the process.

Telefonica has decided to sell a 36.36% stake in Telxius comprising 90.9 million shares. The figure may go up to 40% if the market response remains strong. The shares will be offered to qualified investors in a bookbuilding process running from Sep 20 to Sep. 29. Pricing of the IPO is likely to be settled on Sep. 29 and trading of Telxius in stock exchanges will start from Oct. 3.

Telefonica set an indicative price range of €12- €15 per share. This implies gross proceeds of €1.09-1.36 billion for Telefonica which may go up to € 1.48 billion if the company sells 40% stake of Telxius. Consequently, the infrastructure division will be valued at a range of €3 – €3.75 billion. This figure is well below Telefonica’s initial target of €4 – €5 billion. At the end of Jun 2016, Telxius had an order backlog worth €4.7 billion. It will pay an annual dividend of €70 million in 2017 and to pay out at least 40% of recurring cash flow to shareholders in future.

According to Bloomberg, the reason for lower valuation is the investors’ concern regarding the proper method to value the submarine cable assets of Telxius. At present, the division oversees about 16,000 wireless towers and an international submarine-cable network covering 31,000 kilometers (19,000 miles). More assets are likely to be assigned to the unit over time. In 2015, around 60% of the division’s revenues and EBITDA came from submarine-cable network.

The Telxius IPO is of utmost importance to Telefonica after the European Union telecom regulator blocked the proposed sale of its O2 unit in the U.K. to 3UK of Hutchison Whampoa. The deal was worth around $14.9 billion. Telefonica’s debt currently stands at approximately €52.2 billion (around $58 billion). The company had planned to reduce its debt burden through the divestment of its O2 division. However, the plan fell through as the transaction failed to materialize. Telefonica is now reportedly planning an IPO for its O2 division also.

The spin-off of an infrastructure unit is not new in the global telecom space. Earlier, America Movil SAB AMX had spun-off its Telesite infrastructure division and Telecom Italia SpA TI also followed suit. As of Jun 30, 2016, total customer access lines of Telefonica were approximately 341.9223 million, down 1.8% year over year. Notably, in the Latin American markets, Telefonica competes with large global telecom operators like AT&T Inc. T and America Movil.

According to some industry watchers, Telefonica may now be compelled to vend some of its core assets in order to raise cash and pay-off debt. Otherwise its debt rating may be badly affected. Nevertheless, management expects free cash flow and operating income before depreciation and amortization to be higher in 2017 than in 2016. At this juncture, proceeds from the Telxius IPO can help Telefonica clear part of its outstanding debt.

Telefonica currently carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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