Vodafone won't be only Telefonica sharing deal

12 Jun 2012

Telefonica is waving a big flag that signals “we’ve got this one, thanks,” to investors and financial markets alike at the moment.

The Spanish incumbent followed up on a network sharing deal with Vodafone that could slash the duo’s costs by £1 billion ($1.54 billion) by 2015 with a plan to sell part of its stake in China Unicom that could raise up to HK$11 billion ($1.41 billion).

All this activity comes just a month after the firm revealed net profit for the first quarter fell 53.9% year-on-year to €748 million ($934.9 million) on stable revenues of €15.5 billion (up 0.5% on 1Q11). Chairman César Alierta said the figures are encouraging, given the firm is in the process of switching its commercial strategy.

Analysts believe the Unicom stake sale is a sign Telefonica’s chiefs are waking up to the need to cut the firm’s €57 billion net debt. An insider told Bloomberg the aim is to reduce debt by €6 billion to €8 billion this year alone.

The announcements come as Spain becomes the fourth member state to seek a European Union financial bailout to keep its banks afloat. While Telefonica has previously published details of a report predicting a recovery in the Spanish economy from 2Q13 on, it has also reportedly begun exploring options to float its German and Latin American businesses to raise cash with which to fight its debt battle.

Latin America is emerging as a powerhouse for Telefonica, generating nearly half (48%) of its revenues in 1Q12, however, operating income from the region fell 5.1% year-on-year to €1.3 billion.

The deal with Vodafone shows Telefonica’s management isn’t just focused on improving its cash position by selling everything of value off. Even the sale of Unicom shares comes with a pledge not to sell any more for at least a year, a promise that also gives Telefonica time to assess if other options are working out before it decides to abandon a lucrative emerging market altogether.

It doesn’t take much to work out there could be more network sharing deals on the horizon as part of those ‘other options’, as cost cutting becomes an important part of management’s armory.

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