Telefónica’s HispAm spin-off ‘accelerating’ despite coronavirus

Telefónica’s financial and operational spin-off in most of Latin America remains “on track” and “accelerating” despite the many adverse effects caused by the COVID-19 pandemic, group CEO José María Álvarez-Pallete said in an online conference on Thursday.

The CEO mentioned obstacles related to remote work and market instabilities, but cited the merger just announced with Virgin Media in the UK as an example that plans can move forward despite the current situation.

Álvarez-Pallete did not give details on the status of the negotiations in Latin America, however. 

Together with various other strategic announcements, Telefónica stated in November that it had decided to spin off its units in Spanish-speaking Latin America. 

Álvarez-Pallete said Telefónica is advancing at a very good pace with the divestment of assets in Central America, citing the sale of three subsidiaries in the region (Panama, Nicaragua and Guatemala). A deal in El Salvador is still pending.

However, the group has failed to complete the sale of its Costa Rican subsidiary to Millicom, which pulled out of the deal alleging lack of necessary regulatory approvals. Telefónica claims there is a breach of contract and has said it will go to the courts in an effort to push the deal through.

“In Costa Rica, our reading is that all the conditions that were necessary for the closing of the transaction have been met and therefore we are taking legal action against Millicom, which will take place in New York courts,” Laura Abasolo, Telefónica’s chief finance and control officer, said in the conference.

“Millicom has no legal argument for not closing the transaction. Our fortune is that Costa Rica is a very good operation, generated over 200mn euros in Ebitda and has grown in revenues and accesses” added Abasolo.

VIRGIN MEDIA MERGER 

Álvarez-Pallete also mentioned the 50-50 merger announced with Virgin Media in UK, which is one of the group’s four key markets, along with Spain, Brazil and Germany, according to the firm's strategic plan announced in November. 

According to the CEO, this is the biggest consolidation movement in the European telecoms market in years and creates a major convergent group. The last move of any comparable size in the region was the merger of BT with Everything Everywhere, which was concluded in 2016.  

The executive said that the operations in UK were the sole part not to be integrated and he underlined that the two operations are highly complementary. The new company has combined revenues of over 11bn pounds (US$13.6bn) and 46.5mn accesses, being the market leader in mobile and ultrafast broadband.

“It is the most attractive alternative for Telefónica in Europe and the best strategic option for the company’s future,” Álvarez-Pallete said in the call.

Telefónica expects to receive 5.5-5.8bn pounds upon completion of the merger, which will be used to reduce its debts. The deal is expected to close in mid-2021.

COVID-19 AND RESULTS

Telefónica forecasts a limited impact as a consequence of COVID-19 this year and has maintained its dividend plans.

“Regarding our results, the crisis has had a limited impact in the first quarter. Our four key markets have performed well in a unique and challenging environment. Lower revenues from items like roaming, prepaid and business have been partially offset by lower business costs and a lower rate of customer abandonment,” the CEO said in the company’s report.

The company withdrew its 2020 financial guidance after its quarterly results, however. Net profit fell to 406mn euros (US$438mn), from 926mn euros in 1Q19. 

Telefonica Deutschland posted revenue and profit growth for the first quarter, while Telefônica Brasil reported declines in both.

On the other hand, the company grew by more than 20% in the first quarter in cloud, big data, security and Iot, among other highlights. Detailed results can be seen here.

The company also designed a post-COVID plan that foresees the return to work in a scaled, progressive and safe manner. 

Articulated in three phases, the first phase will be activated on the end of the emergency situation in Spain and will prioritize the resumption of activities scaled down as a consequence of confinement.

The second phase, once the risk has subsided, will give way to the progressive return of other areas. Only when the pandemic is fully controlled will the third phase begin, a new normality based on various forms of digital work and flexibility models, such as telework.