On Mar 28, Zacks Investment Research upgraded Spanish telecom behemoth Telefonica SA TEF to a Zacks Rank #3 (Hold) from a Zacks Rank #5 (Strong Sell).
Telefonica’s acquisition of E-Plus has positioned it as the largest mobile service provider in Germany in terms of subscriber count. In Oct 2014, the company entered into a formal agreement with Vivendi to purchase the latter’s broadband arm GVT in Brazil for around $9.3 million. The deal is already approved by the Brazilian regulatory authority. For Telefonica, synergies from the acquisition appear quite promising.
Recently, Telefonica decided to divest its U.K. wireless operations, which run under the O2 brand, to Hutchison Whampoa. Notably, Hutchison currently operates under the 3 UK brand in the country. At present, O2 serves over 22 million customers and the joint entity will have a consolidated subscriber base of more than 30 million, forming the largest wireless operator in the U.K. The total consideration of the deal stands at GBP 10.25 billion (approximately $15.25 billion).
Hutchison will initially pay GBP 9.25 billion (around $13.75 billion) with an additional deferred payment of GBP 1 billion (about $1.5 billion). The deal is expected to be completed by Jun 2016, subject to customary regulatory approval. Earlier, Hutchison had reached an agreement with Telefonica to acquire the latter’s mobile operations in Ireland.
However, in the short term, we remain on the sidelines considering the slow recovery in Europe, heavy capital expenditures, effects of reduction in mobile termination rates, highly leveraged balance sheet and intensifying competition.
In addition, we expect Telefonica to face increased churn rate (customer switch) and lower Spanish revenues owing to MTR (the fee charged by operators for connecting calls) reductions. Further, the unanticipated economic downturn in Spain is likely to affect the company’s profits and liquidity, going ahead.
Other Stocks to Consider
Better-ranked stocks in this sector include Vonage Holdings Corp. VG, Telecom Argentina S.A. TEO and Chunghwa Telecom Co., Ltd. CHT. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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