O2 sale or IPO back on table

Telefonica, moving forward with a sale of stock in its infrastructure business as it seeks to pare debt, could do the same with its British wireless unit O2 this year if market conditions are favourable, chairman Jose Maria Alvarez-Pallete said.

“We have been working to list it, so if today or in the next few weeks we decided to do so, we could do it by year’s end,” Mr Pallete said at a dinner with reporters in Santander on Sunday.

Selling a stake in the UK carrier to a strategic investor is also still an option, he said: “We could objectively do either one of the two things by year’s end. If markets closed, we would wait. We don’t have the obligation to list or sell at any price.”

Telefonica was counting on proceeds from the planned £10.25bn (€12.2bn) sale of O2 to Hutchison Holdings to reduce its debt load of about €53bn, before the EU in May blocked the deal on competition concerns.

The O2 sale, an IPO of at least 25% of Telefonica’s infrastructure unit Telxius, confirmed yesterday, and increasing free cash flow generation will allow the company to meet its target of lowered debt, Mr Pallete said.

The company expects free cash flow and operating income before depreciation and amortisation to be higher in 2017 than in 2016, Mr Pallete said, without forecasting how much either metric would be.

Despite debt concerns, the company’s annual dividend of 75c a share is sustainable, Mr Pallete said. 

Telefonica could maintain the payout at that level in 2017 by giving shareholders stock if needed — a so-called scrip dividend — allowing the company to keep more cash available.

In July, Telefonica scaled back its debt-reduction goal, saying it will reach a net-debt-to-operating income ratio of 2.35 times in the “the mid-term”. 

In February, the company had said the target would be reached this year, pending the sale of O2, which at the time was facing regulatory review. The ratio stood at 3.2 times at the end of June.

The IPO of Telxius is set to take place this year, Telefonica said in a regulatory filing. The company will decide the price range as well as the percentage of the unit it will offer in the next few weeks, once it has gauged “investor appetite”, Mr Pallete said.

An IPO could give the unit an equity value of as much as €3.5bn. Telefonica had put plans for a Telxius IPO, as well as a listing for O2, on hold after UK voters chose to leave the EU in June. The shock Brexit decision caused stock indexes to fall globally.


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