Spanish operator takes steps to reduce debt mountain following collapse of deal to sell the UK's O2 to Hutchison Whampoa.
Spain's Telefónica has raised about €322 million ($356 million) from the sale of a 1.5% stake in China Unicom as it works on reducing debt in the wake of its failed attempts to divest its UK O2 subsidiary.
The Spanish incumbent ranks as one of the most heavily indebted operators in Europe and had hoped to improve its balance sheet position by selling Telefónica UK Ltd. , trading under the O2 brand, to Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY). Hutchison Whampoa had then planned to merge the business with Three UK , a smaller UK mobile operator it already owns.
Regulatory concerns upset those plans and Telefónica was subsequently forced to take O2 off the market shortly after the UK's "Brexit" referendum, in which the UK electorate voted to quit the European Union (EU), albeit by a narrow majority. (See Brexit Batters Telefónica's O2 Sale Plans, Brexit: It's Hard to See an Upside and Telefónica Eyes Alternative Buyers for UK Biz – Report.)
Amid pessimism about the outlook for the UK economy outside the EU, Telefónica appears to have decided it would not be able to execute a favorable deal in the current conditions.
But the decision to retain O2 for the time being leaves Telefónica with no obvious one-off means of slashing debt, which amounted to roughly €50.2 billion ($55.4 billion) at the end of March -- or about three times the company's operating income before depreciation and amortization.
An O2 sale to Hutchison would have lowered the net-debt-to-earnings ratio to about 2.5, putting Telefónica on a similar debt footing to most of its western European peers.
While the €322 million ($356 million) raised from the China Unicom Ltd. (NYSE: CHU) sale will have only a small impact on financials, it could reassure the investment community that Telefónica is determined to get its borrowings under control.
Telefónica's share price was trading up by 1.2% in Madrid this afternoon, at the time of publication, but remained 16% down from its level at the beginning of the year.
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The divestment leaves the Spanish operator holding a stake of just 1% in China Unicom. In a statement, Telefónica said it was committed to its strategic alliance with the Chinese service provider: The two operators have teamed up on various service development initiatives, including a recent plan to explore opportunities in big data.
Having expanded internationally during the boom years around the turn of the century, Telefónica has recently been rolling back the borders of its telecom empire to focus on a few core markets, including Spain, Germany and Brazil.
In 2013, the company sold its Irish business to Hutchison, its Czech division to a local investment fund called PPF and a stake in its Central American business to industrial group CMI.
— Iain Morris, 
, News Editor, Light Reading
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