Bloomberg News

Alierta Abandons Dividend Penchant to Save Telefonica

July 26, 2012

Telefonica SA (TEF)’s unprecedented suspension of dividends goes against Chief Executive Officer Cesar Alierta’s preference for high shareholder payouts as Spain’s deepening debt crisis leaves the 67-year-old with little choice but to conserve cash.

The board of Europe’s biggest phone company yesterday unanimously approved the plan to halt dividends and cancel share buybacks to save an estimated 10.2 billion euros ($12.6 billion) because it saw that as the only way to secure access to capital markets in the next two years, according to two people familiar with the matter, asking not to be identified because board deliberations are confidential.

Saddled with 58.3 billion euros in net debt and with the company’s rating cut by two credit agencies within a month, Alierta scrapped the payout completely through the final quarter of 2013. Under his 12-year tenure as CEO, Alierta boosted Madrid-based Telefonica’s dividend yield from zero to more than 12 percent, one of the highest in the industry.

“This may well be Alierta’s toughest decision since he took over as cutting the dividend goes against his principle,” said Maximino Carpio, a former Telefonica board member and currently an economics professor at Universidad Autonoma de Madrid. “It’s the same as it’s happening with the Spanish government, which had planned to carry out a program and it had to change it and adjust to the circumstances driven by the economic crisis.”

Villalonga Era

In 1998, under Alierta’s predecessor Juan Villalonga, Telefonica suspended payouts to help finance the former Spanish phone monopoly’s expansion in Latin America. The company continued to remunerate shareholders with bonus shares through 2003. The region now accounts for half of Telefonica’s revenue.

Alierta, who took over from Villalonga in 2000, is known among investors and analysts as an advocate of shareholder remuneration. Even as rivals including France Telecom SA (FTE) and Telecom Italia SpA (TIT) have reduced payouts to conserve cash amid the euro debt crisis, Telefonica continued to reward shareholders.

The scrapped 2012 dividend amounts to 1.50 euros a share. Telefonica will resume paying half of the figure toward the end of next year. Calling the move an exceptional measure in response to an “extremely challenging” economic environment, Telefonica said the plan would help it “immunize from debt markets’ liquidity conditions” by having debt maturities covered till the end of 2013.

Reversing Losses

Telefonica’s stock, which slumped as much as 8.7 percent earlier today, reversed losses and closed 3.4 percent higher in Madrid after Alierta told investors that the company’s earnings have reached bottom.

“The risk perception is totally decoupled with the fundamentals of our business,” Alierta said on a conference call. “Our exposure to southern Europe or even to the euro is well below the exposure of other European players whose headquarters are not in Spain.”

The stock has slumped 33 percent this year, the worst performance among the 23 companies in the Bloomberg Europe Telecommunication Services Index (BETELES), which lost 5.3 percent during the period.

Telefonica investors who stand to miss out on the payments include Banco Bilbao Vizcaya Argentaria SA, Spain’s second- biggest bank with an almost 7 percent stake, Barcelona-based CaixaBank SA with a 5 percent holding and BlackRock Inc. with about 3.8 percent, according to stock-market regulator CNMV.

“Alierta is a big advocate of high dividends and I think he’ll bring a high dividend policy back as soon as he can, though I’m not sure it will be as high as it was,” Carpio said.

‘Prudent Decision’

BBVA fully backs Telefonica’s “prudent decision” amid the current market environment to preserve value with a mid- to long-term vision, spokesman Paul Tobin said.

The cost of insuring Telefonica bonds using credit-default swaps fell as much as 18 basis points, or 3.2 percent, to 544 basis points, the biggest drop in two weeks, according to Bloomberg data. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

After a decade-long expansion strategy that culminated in the $10 billion takeover of Brazilian mobile-phone operator Vivo Participacoes SA in 2010, Alierta is now selling assets. In the past quarter, Telefonica divested a $1.4 billion stake in China Unicom (762) (Hong Kong) Ltd. and announced plans to raise cash by selling shares in its German and Latin American businesses.

KPN Talks

The turning point for Alierta to retreat from Telefonica’s expansion came in May this year after it failed to secure a stake in Royal KPN NV (KPN) and prevent billionaire Carlos Slim’s America Movil (AMXL) SAB from winning a 28 percent stake in the former Dutch phone monopoly, a person familiar with the matter said last month.

After Slim’s offer for KPN was announced in May, KPN accelerated talks with Telefonica, the person said. The companies reached a deal for Telefonica to buy the stake Slim wanted, and then combine the carriers’ German businesses, the person said. The deal collapsed after credit rating companies warned Telefonica that it could be downgraded to junk if the company were to take on any more debt, the person said.

“It is very very clear that there were substantial synergies in market consolidation in Germany but we said very clearly that the priority for Telefonica is deleveraging and to improve our financial flexibility and that’s the reason why this deal has not been done,” Alierta said on the call.

As part of the measures announced yesterday, Telefonica slashed top managers’ total compensation by 30 percent, and board members agreed to take a 20 percent pay cut. About 1,300 employees will be affected.

“It’s significant that Telefonica is doing this,” said Andres Bolumburu, an analyst at Banco de Sabadell in Madrid. “It buys Telefonica more time to carry out asset disposals without selling them at a huge discount.”

To contact the reporter on this story: Manuel Baigorri in Madrid at

To contact the editor responsible for this story: Kenneth Wong at

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