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June 5, 2013
A few weeks ago, Telefónica sold a 40% stake in its operating units in Guatemala, Panama, El Salvador and Nicaragua to local conglomerate Corporación Multi Inversiones (CMI) for US$500m. The transaction does not suggest that the Spanish telecom giant is withdrawing from Latin America, but shows it is increasing its focus on more profitable core operations as it seeks to reduce its heavy debt load, from €51.3bn ($67.1bn) to €47bn.
The decision to offload assets in Central America comes a year after Telefónica announced that its earnings in Latin America had for the first time surpassed its European earnings. By that point, the operator had already started an asset disposal program comprising peripheral, less profitable and less strategic businesses across the footprint, in Latin America as much as in Europe. In fact, the sale in March of the Brazil-based Atento call center business to US private equity firm Bain Capital for $1.3bn is to date the largest debt reduction initiative undertaken by Telefónica, more than five times larger than the recent offload of its UK fixed broadband business to Sky for $310m.
By divesting in Central America, Telefónica is reversing the trend that in recent years has seen both it and the other giant in Latin America, América Móvil, increase their stakes to 100% across their assets. Three of the four countries involved in the CMI deal — Panama, Guatemala and El Salvador, the exception being Nicaragua — are all highly competitive mobile markets by regional standards, with at least three of the five major regional players present: América Móvil, Millicom, Cable & Wireless and more recently the aggressive new entrant Digicel, alongside Telefónica.
Exhibit 1: Mobile market shares in Guatemala, El Salvador, Panama and Nicaragua, year-end 2012
Source: Pyramid Research Q1 2013 Mobile Operator KPI Forecast, Latin America
When it started operations in El Salvador in 1998, Telefónica, along with other large players, was going up against a strong incumbent. It entered Guatemala, Central America’s largest market and the stronghold of Luxembourg-based Millicom, the following year, yet to date it is only third in that country. In Panama it is the market leader, but here too it has faced increasing competition since 2008, when the market ceased to be a duopoly and new mobile licenses were awarded to Digicel and Claro.
Faced with challenging market conditions, Telefónica has opted for keeping control of its Central American businesses while bringing on board a partner with local knowledge and a long presence in the retail business, from which it can benefit in terms of know-how in marketing and sales initiatives. Nonetheless, the asset valuation appears to be highly favorable to CMI. Based on the $500m that CMI is investing for 40% of Telefónica’s Central American operations, the total asset valuation, excluding the recently launched Costa Rican unit, which was not part of the deal, stands at $142 per subscription. This amount is considerably lower, for example, than the $241 per subscription that Chilean operator Entel recently offered NII Holdings for mobile operator Nextel in Peru, the fastest growing Latin American economy. As for mature broadband markets in Europe, the above-mentioned disposal by Telefónica of its UK fixed-line and broadband business to Sky meant that the Spanish company was able to extract from the deal $544 per subscription.
Despite good growth prospects, the lower valuation of the Central American assets is directly related to the lower profitability of Central America when compared with other Latin American operations. In 2012, in the five markets of Guatemala, Panama, El Salvador, Nicaragua and Costa Rica, Telefónica saw 24% revenue growth, from €543m ($710m) to €672m ($879m). Nonetheless, the combination of strong competition, price pressures and lower penetration of data services means that these markets generated the lowest OIBDA (operating income before depreciation and amortization) margin in the region (20.9%). This compares with the 37.9% margin of its largest operational unit, Vivo, in Brazil, and with its 27% margin in Mexico, which is arguably the most challenging Latin American market for Telefónica given the local domination of América Móvil. Overall, Central American operations show the lowest OIBDA per subscription across the entire Latin American portfolio.
Exhibit 2: OIBDA per subscription (US$) in mobile, fixed and pay-TV, Telefonica Latin America, year 2012
Source: Telefonica, EIU, Pyramid Research
To further reduce its debt, Telefónica is looking at additional asset disposals, although it is likely to immediately turn to Europe, starting in the Czech Republic and Ireland. Last year O2 Ireland saw revenue decline 13% from €723m ($1bn) to €629m ($800m) and the lowest OIBDA margin across all Telefónica’s operating units, 20.7%. As for further disposals in Latin America, Telefónica is considering a public listing to sell a minority stake in Movistar Colombia. Arguably Colombia does not fit the description of being peripheral and non-strategic. In 2012, Telefónica’s Colombian revenue expanded 13% from €1.6bn to €1.8bn, representing 6% of its total Latin American revenue, with OIBDA improving 10% to €607m and margins stable over the previous year at 34.4%. We believe that an asset disposal in the third largest country in Latin America, where annual average GDP growth for 2013-2017 is projected at 4.5%, would call for a re-evaluation of the overall positioning of Telefónica in the region.
— Daniele Tricarico, Analyst
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