By Christopher Bjork
MADRID--Spanish telecommunications giant Telefónica SA thought
it was about to seal the acquisition of Mexican cellphone operator
Grupo Iusacell SA de CV from two of the country's billionaires when
a Twitter message from one of them spoiled the deal.
"Telefónica says it wants to buy Grupo Salinas's stake in
Iusacell. It is not for sale," Ricardo Salinas, president of the
family-owned Grupo Salinas wrote to his more than 300,000 followers
in July, marking a rare upset in the Madrid-based operator's push
to gain more scale in fewer markets.
This month Mr. Salinas sold Iusacell to AT&T Inc. for $2.5
billion, more than the Spanish company had offered. Telefónica was
left with a business that remains a distant No. 2 in a market where
it wants to be a leading player.
Over the past year, the Spanish company has sorted out similar
situations by rejiggering parts of its empire, which spans most of
Latin America and three of the five largest economies in Europe.
Telefónica has raised its bets on Brazil and Germany by spending
$20 billion on large acquisitions in those countries. It has
retreated from markets where it lacked scale, such as Ireland and
the Czech Republic, and sold most of its shares in a Chinese
operator.
Telefónica declined a request for an interview on its
asset-shuffling strategy, which appeared to lie behind Monday's
announcement that it is in talks to sell its U.K. wireless unit O2
to BT PLC, the former British telephone monopoly. In a crowded U.K.
market where rivals are beginning to offer consumers packages of
high-speed Internet, cellphone connections and digital television,
Telefónica's O2 may struggle to compete unless it sells out or
bulks up.
"It's the Europe-wide trend, going from having breadth to more
scale in fewer markets," said Jonathan Dann, telecom analyst with
Royal Bank of Canada. Larger rival Vodafone Group PLC, for
instance, sold its stake in Verizon Wireless in the U.S. and
expanded its operations in Germany and Spain. Mr. Dann said
Telefónica would likely to use proceeds from a U.K. sale to
strengthen its position in Latin America's largest markets.
Analysts value Telefónica's U.K. business at roughly $14
billion. BT is also holding talks with a second wireless operator,
EE, a joint venture between Orange SA and Deutsche Telekom AG, and
has cautioned that talks with both wireless operators are at an
early stage.
Teaming up with BT, which owns much of the fixed-line
infrastructure in the U.K. but has no cellphone service, would be a
good fit for both firms and may free up cash that Telefónica could
use to lower its debt load, said Isaac Chebar, a fund manager with
DNCA Finance SA, which owns shares in Telefónica and several other
telecommunications firms.
Telefónica took a back seat during a recent merger frenzy in
Spain that reduced the number of network operators to three from
five. While sales in its home market have declined in recent years,
the company expects them to grow next year. The former Spanish
monopoly has laid fiber-optic cables across the country, allowing
it to serve growing demand for bundled products. It recently
acquired the country's leading pay-TV operator, a move that will
further boost its digital offering.
Telefónica's expansion in Brazil and Germany ended a period of
caution and debt reduction. The firm had saddled itself with more
than EUR50 billion ($62.2 billion) in debt to fund a buying spree
during the boom years before the eurozone's 2008 recession and
subsequent debt crisis sent borrowing costs soaring. Telefónica
bought O2 in 2005 for GBP17.7 billion ($27.8 billion).
While Telefónica has made progress paying off loans, its debt
remains firmly on investors' minds.
"I would certainly prefer that Telefónica sell in the U.K., as
long as it obtains a good price," said Norbert Janisch, a fund
manager at Austria's Raiffeisen Capital Management, which has EUR30
billion in assets under management, including EUR7 million worth of
Telefónica stock. "If they were to stay, they would really have to
invest a lot," he said. "I'd prefer that they reduce debts."
Analysts say Telefónica still has work to do in Latin America,
which accounted for slightly more than half its EUR13 billion
revenue in the third quarter. It agreed this year to acquire
Brazilian broadband provider GVT, allowing Brazil to surpass Spain
as Telefónica's biggest market.
Analysts expect the number of Brazilian cellphone operators to
shrink further, from four to three, and that Telefónica will play a
role.
The company may have fewer options in Mexico, a market where
Telefónica has struggled to gain sufficient scale since it first
invested the country in 2001. Mexico's telecommunication industry
is dominated by billionaire Carlos Slim's América Móvil, which
controls about 70% of the market.
América Móvil decided this year to sell assets in order to cut
its market share to less than 50%, in order to avoid stiff
regulations such as forced network-sharing and the elimination of
charges to connect incoming mobile calls from competing
networks.
Telefónica's chief operating officer, José María Álvarez, said
this month that the regulatory changes in Mexico "provide a much
more level playing field" that gives the company a "much more
positive outlook" there.
But bankers involved in the planned sale of América Móvil assets
say AT&T is the leading contender.
John Stankey, AT&T's chief strategy officer, has said his
company will be "very aggressive" in going after América Móvil
customers, a strategy that would force Telefónica to spend more to
grow in Mexico.
Santiago Pérez and Anthony Harrup in Mexico City contributed to
this article.
Write to Christopher Bjork at christopher.bjork@wsj.com
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