Wishful Thinking Won't Fix Telefonica’s $57 Billion Problem
(Bloomberg Opinion) -- Telefonica SA’s share price needs to double to get back to its 2015 value. Chief Executive Officer Jose Maria Alvarez-Pallete launched a new strategy on Wednesday with a long letter full of the latest corporate buzzwords and setting out the need for radical change and bold vision. The five-point plan that came at the end showed that lofty language can’t hide what’s doable in reality.
The Spanish telecoms operator has been a terrible performer in a terribly performing sector. It has too much debt and too little growth. Worse, there’s a mismatch between its largely dollar- and euro-denominated borrowings and revenues from a big business in Latin America. Financial leverage amplifies its woes. What keeps investors hanging on? A chunky dividend and a yield of 6%.
Pallete imagines a Telefonica that makes “our world more human, by connecting lives in a sustainable way.” He cites Antoine de Saint-Exupery’s apercu that “the essential is invisible to the eyes” in support of a plan to take Telefonica back to its essence, perhaps not quite what the French writer had in mind.
But such a wish-driven strategy runs up against the problem that you can’t make a company with an enterprise value of 96 billion euros ($105 billion) — including $57 billion of net debt — something different just by thinking it so.
The centerpiece of the new plan is that Latin America, except Brazil, becomes non-core. Telefonica has harvested the available growth from this market, and it can’t afford to tie up capital in a business whose contribution is weak and volatile. Selling these assets at a price above the group’s 3.5 times net debt-to-Ebitda ratio would bring down leverage, and that’s a lower multiple than recent transactions in the region, as analysts at UBS Group AG note.
Even asset sales at bad prices would reduce the currency mismatch problem regardless of whether they dented leverage. The snag is that buyers won’t be queuing up. For now, this piece of the plan merely show investors the direction of travel.
Now to growth. Telefonica is creating two new silos made up of its disparate technology businesses and its infrastructure assets. This doesn’t create immediate value but it’s sound management: People perform better when they operate within simple structures with clear goals.
Pallete has been three years in the job and 20 with the company. Would a new CEO from outside have done anything different, especially with regards the dividend? This has been held for the last three years after Pallete cut it in 2016. But the shares yield more than all Telefonica’s large peers bar BT Group Plc. A further trim would have shown stronger commitment to paying down debt and it’s the only deleveraging mechanism the company controls.
The other unresolved issue is Britain, where Telefonica owns the O2 mobile operator. A sale to Liberty Global Plc’s Virgin Media might substantially reduce leverage. But the Spanish company says the U.K. is a core market; it might prefer to be a buyer of Virgin. It’s hard to see how it could justify such a deal right now.
Telefonica is right to be diverting capital to markets closer to home where it can really make a difference as the demand for data explodes. Its problem however is not a lack a vision, but an excess of debt.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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