Bloomberg News

Telefonica Revamps Regional Units in Bid to Stem Stock Drop

September 06, 2011

(Updates with analyst comment in sixth paragraph.)

Sept. 6 (Bloomberg) -- Telefonica SA folded its struggling domestic unit into a European division and shuffled the heads of its regional businesses as Spain’s largest telephone company tries to halt a slide in its stock.

Santiago Fernandez Valbuena, currently chief strategy officer, will take over from Jose Maria Alvarez-Pallete, who will oversee the enlarged European unit including Spain, Telefonica said yesterday. The former phone monopoly also appointed Angel Vila as head of finance and said it will create a digital division in London run by Matthew Key.

“This is a move from Telefonica to bolster its global brand and digital focus while erasing the negative weight that Spain plays,” said Francisco Salvador, a strategist at FGA/MG Valores in Madrid. “Both Valbuena and Pallete continue to be key players within the company as they’ll head those areas where the company has its biggest growth.”

Chairman and Chief Executive Officer Cesar Alierta, 66, is counting on Latin American growth to boost revenue, with Spain’s 21 percent unemployment rate hampering its business there. The Madrid-based company is trying to stem a market share loss as clients look for cheaper deals from operators such as Jazztel Plc and TeliaSonera AB’s Yoigo unit.

Telefonica rose 0.2 percent to 13.52 euros in Madrid trading as of 10:21 a.m. today. The stock has declined 20 percent this year, making it the seventh-worst performer on the Bloomberg Europe Telecommunications Services Index of 21 companies.

Procurement

Royal Bank of Scotland analysts including Lawrence Sugarman said today that Telefonica’s new structure may help to cut costs by centralizing procurement and the development of new offerings, similar to what British phone company BT Group Plc has done. The management of operating divisions along continental lines could also “offer greater scope for operational efficiency,” RBS said.

Telefonica’s sales from Spanish operations fell 6.6 percent in the second quarter, with the profit margin sliding 2.1 percentage points to 45.3 percent. With its new corporate structure, the company wants to speed up decision-making processes and form a more simple and balanced organization, according to the statement.

In Latin America, Telefonica’s second-quarter revenue jumped 12 percent to 7.11 billion euros ($10 billion), making up almost half of the total. Operating income before depreciation and amortization gained 10 percent. Revenue from Brazil surged 40 percent after Telefonica last year took over Vivo Participacoes SA, the nation’s largest wireless operator.

Longer-Term Strategy

Robin Bienenstock, an analyst at Sanford C Bernstein in London, said the changes won’t result in a quick transformation of the company.

“They have top talent so redeploying them to different places may well mean that fresh eyes come up with new solutions,” Bienenstock said. “That said, there are no quick fixes for the structural problems Telefonica faces.”

The Spanish operator will seek organic earnings growth in the markets where it already operates in Europe and Latin America, and isn’t interested in entering the U.S., Chief Operating Officer Julio Linares told reporters yesterday during a telecommunications conference in Santander, Spain.

Interest in U.S. competition was stoked after the U.S. Justice Department sued last week to block the planned $39 billion takeover of Deutsche Telekom AG’s T-Mobile USA business by AT&T Inc.

Digital Business

Key, the new chief of the Internet unit Telefonica Digital, had been running the company’s European operations. The Web division will include social-networking site Tuenti and Jajah, a California-based internet-phone company. Guillermo Ansaldo, who was head of the Spanish unit, will become the chief of global resources, a new unit aimed at guaranteeing “the profitability and sustainability” of all businesses within the group.

Telefonica said in April that sales will climb 1 percent to 4 percent over three years from an adjusted base of 63.1 billion euros in 2010. The company plans to cut debt to between 2 and 2.5 times operating income before depreciation and amortization. The operator intends to pay a 2012 dividend of at least 1.75 euros per share.

“We’re fully convinced we will meet our earnings forecast while keeping investments and our financial agreements with shareholders,” Linares said.

--Editors: Simon Thiel, Kenneth Wong.

To contact the reporter on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net;

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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