Telefónica pares down China Unicom stake

The Spanish telco turns to Asia at the weekend to raise funds to help slash its debt, executing a $365 million divestment after suffering post-Brexit UK setback.

Spanish telecommunications operator Telefónica Internacional raised HK$2.8 billion ($365 million) from the sale of more than half its remaining stake in China Unicom on Saturday to help reduce its debt.

The transaction was conducted through an accelerated bookbuild with Telefónica offering 362 million China Unicom shares -- or 1.5% of the Chinese telco -- at an indicative price range of HK$7.75 to $7.85 per share, according to a term sheet seen by FinanceAsia.

Telefónica launched the trade over the weekend under the advice of sole bookrunner Bank of America Merrill Lynch, with the intention of avoiding additional market risks going into next week, a source familiar with the situation told FinanceAsia.

As such, it forms part of an emerging trend as high-profile issuers seek to avoid putting themselves at the mercy of volatile global markets, where investor sentiment can change dramatically in a matter of hours. By targeting the weekend, investors have more time to digest the trade, minimising the possibility of any panic-selling in the aftermarket.

Telefónica’s China Unicom stake sale is the second block trade in Asia conducted on non-trading days so far this year, after AIG sold $1.25 billion of PICC P&C shares in late April.

Unlike the AIG trade, Telefónica did not sound out investors before the transaction, according to the source. So all the demand was genuinely generated on Saturday, making the deal's success all the more impressive. 

The final order book was several times oversubscribed with demand predominantly coming from hedge funds, according to the source familiar with the matter. Final pricing was fixed at the half-way point of the indicative guidance at HK$7.8, representing a final discount of 2.3% over China Unicom’s HK$7.98 Friday close.

Strategic alliance

The timing of the sale was less than ideal since China Unicom's share price has been trading at its lowest in more than seven years, partly due to its slower development of 4G compared with China Mobile and China Telecom. Down 13.6% year-to-date, China Unicom's shares are also the worst performer among the so-called “Big 3” telecommunications operators.

Telefónica acquired the shares through a strategic alliance with the Chinese telco in September 2009, when the two firms agreed to mutually invest $1 billion in each other. At that time the Spanish telco acquired the shares at approximately HK$10, which means it roughly made a 20% loss on the batch of shares sold this weekend.

Yet overall the company has recorded a gain because the bulk of its China Unicom shares were offloaded in November 2014 when it sold a 2.5% stake at HK$11.14 per share.

After Saturday’s trade Telefónica is left with 238 million China Unicom shares, or about 1% in the Chinese company, which are now subject to a 90-day lockup.

The cross-shareholding ties between the two telcos have been further weakened following Saturday’s sale, although the source familiar with the matter said the companies will continue to engage to strategic partnerships in various business lines.

In January the two companies set up a joint venture to provide big data services to Chinese companies. They also co-launched a low cost smartphone in Telefónica’s key Latin America markets in February.

“Both China Unicom and Telefónica commit to continue expanding their collaboration in future joint common procurement activities and additional joint strategic initiatives,” the Spanish company said in a statement in February.

Debt reduction

Telefónica sold the China Unicom shares despite the inclement timing because it faces a potential credit downgrade from Moody’s if it doesn't reduce its high debt levels, which may have subsequently lifted its borrowing costs.

As of the end of March, the telco had short-term liabilities of €31.3 billion ($34.5 billion) and its total debt-to-equity ratio stood at 217.4%, according to S&P Global Market Intelligence.

Telefónica’s rating outlook is currently placed on negative watch by Moody’s and while it currently maintains a Baa2 rating, two grades above junk level, it could fall into that category if it does not deleverage meaningfully by the end of the year.

The company’s asset sale plans in Europe were derailed by Britain’s surprise vote to leave the European Union last month, leading to a sharp plunge in the pound.

Shortly after the Brexit vote, Telefónica announced the termination of a planned initial public offering of British wireless carrier O2, which could have fetched as much as $14 billion before the value of sterling slumped. 

Before that the Spanish company had attempted to sell O2 to rival UK mobile provider Three, which is a subsidiary of Hong Kong-headquartered conglomerate CK Hutchison, but the sale was rejected by antitrust regulators in January.

Telefónica has also delayed the sale of its infrastructure unit Telxius because of the Brexit vote, according to local media reports.

¬ Haymarket Media Limited. All rights reserved.

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