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Telefonica Mulling Non-Core Asset Sale in Central America

Supriyo Bose

Telefonica S.A. TEF is reportedly considering divesting its non-core assets in Central America to reduce debt burden and focus on core businesses in other parts of the world. The relatively small business operations in the region include assets in Costa Rica, El Salvador, Guatemala, Nicaragua and Panama.

The company is yet to reach a deal with any potential suitor in this regard. Management has also been tightlipped on the issue and has refused to divulge details. Meanwhile, media reports reveal that Telefonica is in negotiations with América Móvil, S.A.B. de C.V. AMX to divest its El Salvador and Guatemala businesses.

The continued asset sale transactions are aimed to increase liquidity and ease its burgeoning debt pile. Telefonica ended third-quarter 2018 with cash and cash equivalents of €6,138 million ($7,121.2 million) and non-current financial liabilities of €47,482 million ($55,087.9 million). In the first nine months of 2018, the company generated free cash flow of €2,957 million, down 8.3% year over year.

In addition to the debt-laden balance sheet, the company looks relatively more leveraged than the industry. Notably, its debt/capital ratio is currently pegged at 0.65, significantly higher than 0.48 recorded by the industry.

It seems that Telefonica is grappling with various short-term challenges that have hindered its operations. Domestic competition poses a major hurdle as the unbundled local loop (ULL) regulation is compelling the company to make its network available to alternative providers. The ULL regulation, along with increased exposure to direct access competitors are primary factors behind wireline telephony access erosion.

However, Telefonica is successfully capitalizing on the opportunities in the digital world through several growth strategies to script a turnaround in its fortunes. The company has significantly accelerated the deployment of ultrafast networks. Notably, it continues to witness increased traction in the smartphone arena. Continued rollout of fiber and LTE are set to drive considerable growth of the company. Moreover, Telefonica has upgraded 2018 guidance and currently expects revenues to grow around 2% year over year compared with 1% guided earlier. OIBDA margin is anticipated to expand 0.5%.

It remains to be seen how the sale of non-core assets to focus on core operations benefits the company in the long run.

Telefonica currently has a Zacks Rank #4 (Sell). Some top-ranked stocks in the same space are Shenandoah Telecommunications Company SHEN and Swisscom AG SCMWY, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shenandoah Telecommunications surpassed estimates thrice in the trailing four quarters, the average beat being 86.7%.

Swisscom has long-term earnings growth expectation of 1.6%.

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