Telefonica mulls Mexican IPO as part of O2 contingency planning
Telefonica [BME:TEF] is considering an IPO of its Mexican business in case the European Commission (EC) blocks the massive sale of O2 UK to Hutchison Whampoa [HKG:0013], said a person familiar with the situation and two bankers.
Telefonica is working on an alternative plan to preserve its deleveraging target in the event that its GBP 10.25bn (EUR 13bn) deal falls through, according to press reports. Moody's is predicting EUR 15bn of debt reduction through 2017, including the disposal. However, Hutchison is declining to propose further remedies, in a move which might lead to the deal getting blocked by the EC, as reported.
Much of the shortfall from a blocked deal could be met by adjusting Telefonica’s dividend, the person added. A dividend cut would probably bridge the gap sufficiently to keep the rating agencies happy while it looks at other options, the second banker agreed.
An IPO of Movistar Mexico is one of the options under consideration, said the person, who added that an IPO of O2 is also an option. The Mexican unit offers telephony and internet. IPOs of both businesses would make sense as a way of raising cash, said one banker briefed on the situation.
However, O2 would probably be an easier business to list than its Mexican sister business due to its greater size, said a second ECM banker. The Mexican business is much smaller than the UK one, with an operating income before depreciation and amortization (OIBDA) of EUR 481m in 2015. By contrast, Telefonica’s O2 UK business made an OIBDA of EUR 1.93bn in 2015.
Another option to raise cash would be to sell O2 to another player in the space, like Sky [LON:SKY] or Liberty Global [NASDAQ:LBTYA], said the person. Illiad [EPA:ILD] of France has already been tipped as a potential bidder by this news service.
Sky would be reluctant to buy capital-intensive infrastructure, but doesn’t rule a deal out completely, said one person familiar with its thinking. The broadcasting company, which already has a mobile virtual network operator (MVNO) deal with O2, could reconsider its stance if the price were very low, the person added.
Illiad would be a likely suitor for O2, particularly if Telefonica is flexible on price and structure, said one London-based banker following the situation. The French company, which has reportedly contacted UK telecoms regulator Ofcom about entering the UK market, attended the O2/Hutchison oral hearing in Brussels in March, as reported.
Spokespeople for Sky and Liberty declined to comment. Illiad could not be reached for comment.
The company will stick to its playbook for the IPO of its telecoms infrastructure unit Telxius if O2 collapses, this news service reported earlier today (Thursday). However, the unit will have pre-emption rights on other infrastructure assets and the company could be more aggressive about wrapping other businesses into the unit, it was said.