Telefonica Agrees to sell up to 40% of Telxius to KKR, Will O2 be Next?

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Just one year after spinning off their infrastructure arm and creating Telxius, Telefonica (BME:TEF have announced an agreement with private equity firm KKR (NYSE:KKR) to sell up to 40% of the company for €1.275 billion, giving Telxius a valuation of around €3.2bn.

This comes just five months after the company scrapped an IPO valuing the company at €3.75bn due to weak demand. The current agreement, subject to regulatory approval, will see KKR purchase 24.8% of the company for €790m. This comes with an option, in the fourth quarter, to purchase a further 15.2% for at least €485m. The deal in place will leave Telefonica with a majority stake as well as operational control of Telxius.

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Telxius operates 16,000 telecom towers in five different countries, as well as managing 65,000km of submarine cables of which 31,000km are owned. This includes the world's fifth longest submarine cable in SAM-1, connecting North and South America. This large network has seen it create partnerships with other telecom companies, such as Euskaltel (BME:EKT) and Internexa.

As Telefonica and its subsidiaries act as Telxius' main customer, it's understandable that the company also has an interest in keeping a majority stake. Particularly so, considering the Americas and Spain, where 11,000 of the companies towers are based, show high growth in mobile data and the need for a stable internet connectivity. Telxius highlights itself as the only European company with exposure to emerging markets, letting it take advantage of this growth.

Telefonica and Reducing Debt

This sale is part of Telefonica's plan to reduce the rather monumental debt pile it currently has. Their net debt, as of September 2016, stood just short of €50bn. The company has been looking to reduce this for a reasonable length of time. One example of this was a previously blocked sale of O2 for £10.3bn by the European Commission last May. Following this was a nixed IPO of the company following the Brexit vote as a result of market uncertainty.

Of course this is only a small dent in the company's debt. What this may indicate is a fairly strong potential of selling or listing O2. As the UK's second largest mobile phone company, O2 has shown strong growth in users. Telefonica's 2016 Q3 report indicated a 3.3% year on year growth in customers, as well as a market-leading churn rate of 0.9% for the quarter. This position in the market, as well as growth in the area, could generate a reasonable level of interest for the company.

The potential of an IPO for O2 has also increased due to improved market conditions and reasonable stability in the UK, compared to when the idea was initially shelved. However, the uncertainty over upcoming Brexit negotiations may also indicate a higher probability of a listing. Following the vote in Parliament on legislation to allow the government to go ahead with invoking article 50, and the ease of which it appears to be flowing uncontested through the House of Lords, now may be the ideal time for Telefonica to sell or list its UK asset.

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