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S&P Leery Over Telefónica Deal

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LONDON -- Standard & Poor's Ratings Services said today it placed its ratings on Spain-based telecommunications services provider Telefónica S.A.--including its 'A/A-1' corporate credit ratings--on CreditWatch with negative implications following the group's announcement that it has reached an agreement with U.S.-based telecoms operator Bellsouth Corp. (A+/Watch Neg/A-1) to buy the company's cellular assets in Latin America.

"The CreditWatch placement reflects concerns about the potential effect of the acquisition on Telefónica's business and financial risk profiles given the economic, financial, and political risks of operating in Latin America and the investments necessary for the future development of these operations," said Standard & Poor's credit analyst Leandro de Torres Zabala.

Telefónica's acquisition agreement with Bellsouth regards 10 cellular operations in 10 countries of Latin America: Argentina, Chile, Peru, Venezuela, Colombia, Ecuador, Peru, Guatemala, Panama, and Nicaragua. The agreement implies a total value for 100% of the assets of $5.9 billion. At Dec. 31, 2003, Telefónica had net financial debt (excluding guarantees and preretirement liabilities) of about €19.2 billion ($23.7 billion).

For the resolution of the CreditWatch, Standard & Poor's will seek to measure the effect of the agreed acquisition on Telefónica's business and financial risk profiles. The company's future strategy and risk management, particularly with respect to the development and integration of the acquired assets, will be another key consideration. At this time, Standard & Poor's expects any lowering of the ratings to be limited to one notch, given Telefónica's preacquisition solid balance sheet and strong operating metrics. The CreditWatch placement is expected to be resolved within the next two months.

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