Spanish Telecom giant, Telefonica SA (TEF), has stalled the planned IPO (initial public offering) of its Colombian subsidiary until next year. Unfavourable stock market conditions and a pending presidential election in the country have resulted in the postponement.
In Apr 2013, Telefonica planned to list its Colombian unit to strengthen its capital structure as it continues to struggle against market leader, America Movil S.A.B de C.V. (AMX). The company intends to raise $644.0 million (€500 million) from the share sale by offloading a 19% stake in the subsidiary.
However, the presidential election due in May 2014, is complicating matters for the telecom behemoth. Although Telefonica holds a majority 70% stake in the company, the remaining control lies with the Colombian government. Therefore, the Spanish giant needs the government’s approval before divesting the stake, which the government is unwilling to give. Adding to the problem is the declining stock market in the emerging countries and Telefonica’s huge pension fund deficit of $1.5 billion.
Telefonica has one of the highest debt burdens within the industry with an outstanding debt of approximately $68.43 billion at the end of the first quarter of 2013. The IPO is part of the company’s policy of divesting its non-core assets to reduce its huge debt burden. Telefonica is expected to reduce its debt by approximately $6.4 billion (€5 billion) by the end of 2013.
The telecom behemoth has stopped paying dividends and is planning a widespread restructuring to considerably reduce its leverage. The company raised $1.93 billion (€1.45 billion) by listing its German unit, Telefonica Deutschland, and has also sold its minor stake in China Unicom Limited (CHU) for $1.47 billion (€1.13 billion).
Recently, Telefonica agreed to sell its Irish operations to Hutchison Whampoa’s 3 Ireland for $1 billion (€780 million) and offloaded a 40% stake in its Central American operations for $500 million (€ 389 million).
Owing to continuous struggle in Europe and market saturation in Brazil, Telefonica depends on smaller Latin American countries for growth. We believe that the IPO delay could hurt the company’s expansion as the company recently won a 4G license in Latin America’s fourth largest economy, Columbia.
Currently, Telefonica carries a Zacks Rank #3 (Hold). Among other companies, Telus Corp. (TU) with a Zacks Rank #2 (Buy) is a better option for investors.
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