Telefonica May Keep Hold of Subsea Cable Unit in Overhaul

Telefonica SA may defy expectations for an outright sale of its submarine cables and bring in investors to share ownership of the business instead.

The Spanish phone company has been working with advisers to gauge interest from potential buyers. It was hoping to offload the business for about 2 billion euros ($2.4 billion), according to media reports last year.

Instead, the carrier could carry out a partial sale, then fold the asset into a standalone infrastructure division it created in 2019, Chief Operating Officer Angel Vila said in an interview.

Telefonica wants the new division to function “like any infrastructure investment fund,” said Vila. It already contains Telefonica’s fiber-optic broadband network in Germany and is moving ahead with a fiber joint venture in Brazil and a data center partnership.

Telefonica shares were up 0.1% as of 2:03 p.m. in Madrid. The stock has risen 23% since the start of the year.

An infusion of new investment could boost the value of the assets and raise cash to cut Telefonica’s 35 billion-euro ($42 billion) debt pile. It’s part of a broader push by Europe’s telecommunication companies to show investors what the hardware that underpins their businesses is worth, and boost returns.

Telefonica is facing intense competition and years of share-price underperformance. Chairman Jose Maria Alvarez-Pallete proved he’s ready to take more radical steps to lower borrowing when he agreed an outright sale of most of Telefonica’s wireless masts to American Tower Corp. in January for 7 billion euros.

The new infrastructure unit, which has kept some masts in the U.K. and Latin America, plans to focus on new infrastructure projects rather than bidding for existing assets in competition with other funds, Vila said.

It’s a different approach to larger rival Deutsche Telekom AG, which has created a joint venture with independent mast operator Cellnex Telecom SA and is ready to compete for assets with the goal of achieving a 10% to 15% overall return on investment.

Vila said Telefonica isn’t targeting a specific measure of profitability for its entire infrastructure unit, but will look for different rates of return based on the type and location of each asset. It’s unlikely to seek an investment partner for the unit itself, and will look for investors in each specific project.

“A partner for the unit may not be the best way to optimize value. When you have different types of assets, you have different multiples,” he said. Blending multiples means you tend to get lower valuations for certain assets, he said.

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