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Summary

Telefónica announced a new reorganization of its business at the end of November. Although such moves are not uncommon with the Spanish operator, this time the changes were bold and far reaching. Telefónica will focus on four countries: Spain, Germany, the UK, and Brazil. It will create new business units: Telefónica Tech for its digital services and Telefónica Infra to drive monetization of its infrastructure assets; and will spin-off its Hispano-American operations in Argentina, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and Venezuela.

Telefónica chooses its battles and leaves Latin America telecoms market open for grabs

Under José María Álvarez-Pallete López'sleadership, Telefónica Group has been focused on two main goals: to transform Telefónica into a digital telco and reduce debt. All major investment, and divestment, decisions taken by Telefónica can be understood with these two goals in mind. This time is no different – the company is giving up on the role of regional giant in Latin America and focusing on the geographies that make up to 80% of the group's revenue and betting on digital business with the Tech unit.

Telefónica Tech looks similar, at least in scope, to Telefónica Digital, a unit created years ago with the same remit. However, these digital services have grown significantly in the past years, and it is likely that they now have the scale to justify this move. Revenue in areas like security, IoT, and cloud, are all growing at double-digit rates and are on track to each become $1bn-a-year businesses.

On the other hand, for a Latin American market that is used to following the fight for hegemony between America Movil and Telefónica, the reorganization raises many questions about the future of competition. Telefónica ended up with a very complex portfolio in the region that, mixed with the regional instability, has led to this choice. The decision to pool together Hispano-American operations is also a way to deal with this complexity, since it would be difficult to sell some of these units (for example, in Mexico, where Telefónica is "squeezed" between Americal Movil and AT&T, or Venezuela), so putting these assets together with bigger operations such as Argentina, Chile, and Peru creates a more attractive opportunity. The question the sector will be asking for the next few months will be "who can buy it?" America Movil is unlikely to benefit, due to regulatory constraints, but who else? Investor groups, other local operators, new players – this is a big unknown.

Finally, this reorganization could impact the Brazilian market. Telefónica's COO Angél Villá declared in early November that Oi has begun the process of selling its mobile business. This move could trigger a broader consolidation in Brazil and it is now clear that Telefónica aims to be ready for this.

All in all, Telefónica leadership has shown, once more, that it is fully committed to transforming the business and preparing it for the future.

Appendix

Further reading

2020 Trends to Watch: Brazil, GLB007-000254 (June 2019)

"Digital Profile: Telefónica," GLB007-000278 (August 2019)

Author

Ari Lopes, Principal Analyst, Latin America

ari.lopes@ovum.com

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