Telefonica moves ahead with O2 Germany IPO

Telefonica started the sale of up to 20 per cent of its O2-branded German subsidiary yesterday, with the company set to raise up to €1.5 billion from the initial public share offer which is now expected to go ahead later this month to help cut the Spanish group’s huge debts.

Announcing the intention to list its shares by the end of the year, Telefonica Deutschland told potential investors that it aims to pay a dividend next year of €500 million on its 2012 profits.

The flotation is part of Telefonica’s efforts to reduce its €57 billion debt pile and keep its prized investment-grade credit rating, under threat from the troubles in Spain.

The company must raise €7-8 billion a year through 2015 to cover debt repayments and risks rising refinancing costs if credit ratings were cut.

Telefonica did not say yesterday how much of Telefonica Deutschland it planned to float.

The final size of the offer will depend on now gauging investor demand and price, said two financial sources, with marketing to potential buyers set to begin immediately.

One of the sources had said previously Telefonica aimed to list between 10 and 20 per cent of Germany’s smallest mobile operator, which it has valued at €10 billion. The liquidity of the newly listed entity will likely prove a key issue for investors, who tend to shy away from small partial listings, especially when they are under the control of a powerful majority shareholder such as Telefonica.

A listing of 10 per cent of Telefonica Deutschland would therefore be too small to attract investors, said the sources.

One said the IPO should raise above €1 billion for Telefonica but is unlikely to top €1.5 billion, with Telefonica Deutschland roughly valued at around €8 billion to €9 billion and only existing shares to be sold.

The company’s executives will begin a roadshow of presentations to potential investors in around two weeks’ time.

In Germany, Telefonica’s 02 brand is the smallest mobile operator with roughly 16.4 per cent of subscribers, trailing KPN‘s E-Plus, Deutsche Telekom and Vodafone.

However, analysts and bankers say room for growth makes Telefonica Deutschland an attractive prospect for investors, along with the promised dividend payment, which Telefonica said will increase in the coming years.

“We are operating in one of Europe‘s strongest economies and one of the biggest telecoms markets on the continent,” Rene Schuster, chief executive of Telefonica DeutsGermany said.

Telefonica Deutschland‘s net debt stood at €1.1 billion at end September.

The unit’s €500 million dividend payout next year could make the dividend yield as high as nine per cent depending on the final valuation of Telefonica Deutschland, though six to seven per cent is more likely, according to the sources.