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Brexit Made Telefonica Lucky. It May Also Be Smart

Alex Webb
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Brexit Made Telefonica Lucky. It May Also Be Smart

(Bloomberg Opinion) -- Europe’s political vicissitudes have been bad for France’s Orange SA and Germany’s Deutsche Telekom AG. Curiously, in one respect they’re proving positive for Spain’s Telefonica SA.

All three reported earnings on Thursday. Telefonica, long the poor relation among the former national carriers, provided the only bright spot, forecasting growing profit and sales this year where analysts had expected stagnation and a decline respectively.

The irony is that Brexit has helped the Madrid-based firm. Were it not for Britain’s planned departure from the European Union, Telefonica would have likely carried out an initial public offering of its U.K. business O2 at some stage over the past two years, reducing its contribution to earnings. But the IPO was put on hold, and as it turned out, those operations last year provided the biggest profit and revenue increases. 

The tale in France is rather different. Orange shares fell the most in six weeks after saying earnings growth would slow in 2019. It attributed the slackening to the steep competition in France, where the four operators are engaged in a brutal price war. The country’s political climate has all but eliminated any likelihood of a let-up in that tussle.

Last year the national regulator expressed an openness towards industry consolidation which would reduce the number of carriers to three. However, the rise of the anti-capitalist yellow vest movement has now made the politics of such a move incredibly tricky.

Deutsche Telekom, which is accelerating spending on 5G, also disappointed investors with its prediction for 2019 earnings. The German government is forcing carriers to frontload investment in the next-generation of networks as it tries to give its industrial heartland a boost in the face of rising trade hurdles.

Telefonica still trades at a discount to the two European rivals. It of course has disadvantages: Orange has more exposure to fast-growing Africa, and investors are salivating at the prospect of Deutsche Telekom's U.S. subsidiary acquiring Sprint Corp., which will significantly increase its market share. Economic growth has slowed in Brazil, Telefonica's main emerging market.

But the Spanish carrier is rapidly closing the gap on its main discrepancy: its vast relative debt pile. Its net debt to Ebitda ratio is creeping down closer to the levels of Deutsche Telekom and Orange, helped slightly by the divestment announced on Wednesday of some Central American businesses to Millicom International Cellular SA for $1.6 billion.

Its German rival is meanwhile taking on further debt to fund the Sprint acquisition, and Vodafone Group Plc is doing the same in order to buy Liberty Global Plc’s cable assets in Germany and Eastern Europe. That means their debt ratios will rise closer to Telefonica’s. 

Another good omen for the Spanish company’s future is that, if or when the O2 IPO finally happens, the business will be offered to investors in a far healthier state.

As ever in the telecommunications industry, political winds are out of the control of management. But Telefonica has done well to focus on its operations, capitalizing on that flightiness and turning it into a virtue.

To contact the author of this story: Alex Webb at awebb25@bloomberg.net

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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