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Summary

Telefonica has sold its operations in Guatemala and El Salvador to its rival America Movil (AMX) in order to reduce debt and free up capital so that it can invest in strategic priorities such as 5G. Furthermore, Telefonica's stock performance in recent years shows that investors are not happy with the company; reducing debt is a crucial step towards recovering their confidence.

Telefonica needs to de-leverage to get ready for the future

It is not very common for rivals Telefonica and America Movil to do business with one another. Business requires pragmatism however, and Telefonica has announced the sale of its operations in El Salvador and Guatemala to the Mexican operator.

Telefonica needs to raise funds to reduce debt, and the €570m raised through this sale will help to fulfil this target. Its net debt stood at €42.6bn by 3Q18, which already represents a €1.0bn reduction in 18 months. The company's shares have been losing value for several years – the stock has lost 52% of value in the New York Stock Exchange since 2013, for instance – and reducing the debt is an important step in recovering investors' confidence.

It is hard to make a precise assessment of the price paid, as Telefonica has stopped reporting ARPU for these countries. In 2Q16 it announced an ARPU of €5.3 for Central American markets, but that includes higher-income countries such as Panama and Costa Rica. This is the best available information, however, and if we use this ARPU and take into account Telefonica's 5.2 million Movistar subscribers in El Salvador and Guatemala, we can estimate that America Movil paid €109 per subscriber, which seems high.

While Telefonica still has operations in Costa Rica, Nicaragua, and Panama, these are also likely to be sold at some point. But this sale gives no clue about the fate of Telefonica's Mexican operation, given that America Movil would not be allowed to buy it as it is already the preponderant operator in Mexico. But the company can potentially unlock more than €1.0bn in capital if it can unload its operations in Mexico as well as Costa Rica, Nicaragua, and Panama.

Telefonica's need to reduce its debt has a degree of urgency; the industry is at the doorsteps of 5G and the operator will need to invest in spectrum and equipment in the several countries in which it operates if it is to keep up with competitors. Furthermore, 5G offers a rare opportunity to inject a new dynamic into an otherwise mature sector, and the operator cannot afford to miss this opportunity – it will be several years before another one emerges.

Appendix

Further reading

Telefonica Update, October 2018, GLB007-000147 (December 2018)

“Latin America is likely to be slow to adopt the new 5G standard, and that's fine,” GLB007-000108, (August 2018)

“5G & LTE Latin America event reveals an opportunity for regional collaboration in 5G,” GLB007-000080 (June 2018)

Author

Ari Lopes, Principal Analyst, Latin America,

Ari.lopes@ovum.com

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