Telefonica’s CEO recently announced its intention to spin-off all its Latin America business, except Brazil. It will focus only on Spain, the UK, Germany – and Brazil. Although it has been a surprise for some, there were warning signals that this may happen.

Telefonica has an accumulated debt of USD $42 billion and was recently pressured by large investors, to decrease its exposure in Hispanic Latin America. In the last two years, Latin America's social-economic environment has been more volatile. This has spooked investors, who now want to reduce their exposure. Telefonica also sold all its Central America business at the beginning of 2019.

Telefonica’s Business in Hispanic Latin America

Telefonica Latin America is currently divided into three subregions: HISPAM Norte, HISPAM Sur, and Brazil. In terms of countries, Hispanic Sur includes Argentina, Chile, Peru, and Uruguay. HISPAM Norte includes Colombia, Ecuador, Venezuela, and Mexico.

Exhibit 1: Share of Telefonica Mobile Connections in Key LATAM Markets

Source: AMX 3^rd Q 2019 Financial results, TEM Ene-Sep 2019 Financial results, IFT, Mintic, Osipitel, Subtel, Enacom

Telefonica had also struggled in countries like Mexico and Colombia to increase share and profitability. Both of these countries’ subscriptions are mostly prepaid.

Early Warning Signals of Telefonica’s intention to quit Hispanic speaking LATAM

In addition to the sale of its Central America businesses, other signals have included:

• The CEO promising to do anything to return the company to growth and profitability
• Venezuela has a big impact on Hispanic Norte’s overall success. Until 2008, it was the most profitable market in HISPAM Norte. But after less than 10 years it is now a burden, though given the country’s dire political and economic situation, it may prove difficult to find a buyer.
• In October 2019, Telefonica Mexico signed an eight-year deal to use AT&T’s last-mile infrastructure. Hence Telefonica does not need to build its own network.Immediately after the agreement, Telefonica Mexico solicited IFT (Mexican regulator) to allow it to return not used spectrum, so it can be released to pay for the unused spectrum. As there is no regulation about the returning spectrum, IFT is analyzing how to implement it.

Securing the 80% of the Business

Spain, UK, Brazil, and Germany accounts for around 80% of Telefonica’s global revenue, while Hispanic LATAM represents just 20% (Exhibit 2). Furthermore, the Hispanic LATAM market contribution to total revenue and EBITA has been declining in the last two years, affected by economic uncertainty and downturns in several main markets.

Exhibit 2: Hispanic Latin America’s weight Over Telefonica’s Total Business Results 2019

Source: TEM Ene-Sep 2019 Financial results

Hispanic LATAM represents almost 40% of Telefonica’s total lines which means the operation consumes a lot of the company’s resources. Telefonica is determined to increase its focus on parts of the business that generate the 80% of the revenue and that are also the most profitable. Telefonica also expects this part of the business to provide most growth opportunities.

Potential Buyers

It will be difficult to sell all seven countries business in a block, unless it is a new player to the region; only a player that is not currently in the region could make it through the antimonopoly regulations. For example, the sales of Telefonica’s business in El Salvador to Claro has not yet been approved.  Possible buyers include:

Liberty Latin America: recently bought AT&T Puerto Rico. This operator is financially solid and looking for growth through acquisition but prefers to stay in small countries such as those in Central America and the Caribbean. The only outlier is Chile with VTR.

Millicom: purchased Telefonica’s Costa Rica, Panama, and Nicaragua businesses. These were markets most in line with Millicom’s target market. Similar to Liberty, the Luxembourg-based operator prefers to do business in smaller and less developed countries.

America Movil: is the biggest operator in the region. It is already the dominant player in almost all markets that Telefonica is selling its business (Exhibit 1). It bought the Guatemala and El Salvador businesses from Telefonica at the beginning of the year. And El Salvador’s transaction is still pending regulatory approval. It will be difficult for America Movil to get regulatory approval to buy any of Telefonica’s businesses this time.

Chinese operators: China Mobile is the world’s largest mobile operator. It established an office in Brazil in 2017. This generated attention from many players in the region. But the office is mostly dedicated to supporting enterprise customers. Telefonica’s sales may be attractive as an expansion opportunity, but it doesn’t look likely.

Telefonica’s announcement could also be a way to attract strategic partners and to subsequently launch a local IPO. At present Hispanic LATAM region will report to Telefonica’s CFO, a sign that this business is becoming a financial package.

Telefonica share price increased more than 5% following the announcement suggesting the sale will be accretive in value to investors.

Whatever type of sale is undertaken, Telefonica’s exit will change the Latam telecommunication landscape. We’re not sure it will be a positive change in the short run, but may lead to less concentration and more competition in the long run.