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Tickers in this Article: TEF, CHU, LBTYA, VOD
Telefonica SA (TEF) will sell its Irish subsidiary – O2 Ireland – to Hutchison Whampoa’s 3 Ireland for €780 million ($1 billion). The divesture is part of the company’s attempt to reduce its enormous debt burden.

Per the agreement, Telefonica will receive an additional deferred payment of €70 million ($90 million) post the fulfilment of the agreed financial targets. However, Hong Kong-based Hutchison has to face regulatory hurdles as acquiring O2 Ireland will create a monopolistic situation within the Irish telecom market.

O2 is the second-largest mobile phone operator in Ireland. Nevertheless, in the last couple of years, the company has lost market share to Vodafone Group Plc. (VOD), Eircom and Hutchison’s 3 mobile brand. Telefonica’s O2 Ireland has received bids from Eircom Group, Hutchison’s 3 and Liberty Global Inc. (LBTYA).

The combination of the second and the third-largest telecom carriers in the Irish market will have an estimated market share of 37.5%. Post the acquisition, 3 Ireland will have the size and financial backup to challenge the market leader, Vodafone Ireland.

Telefonica continues to struggle in Europe as declining mobile data usage and fierce competition continue to hurt the company’s profitability. Additionally, Telefonica has one of the highest debt burdens within the industry with outstanding debt of approximately $68.43 billion at the end of the first quarter of 2013.

The transaction is part of Telefonica’s policy of disposing its non-core assets to reduce its huge debt burden. Telefonica wants to reduce its debt by approximately $6.4 billion (€5 billion) by the end of 2013.

The telecom behemoth has stopped paying dividends and is planning a widespread restructuring to considerably reduce its leverage in an attempt to weather the difficult situation. The company raised $1.93 billion (€1.45 billion) by listing its German unit, Telefonica Deutschland, and has also sold its small stake in China Unicom Limited (CHU) for $1.47 billion (€1.13 billion).

Recently, the Madrid-based company sold a 40% stake in its Central American operations for $500 million (€ 389 million) and is also considering the sale of its Czech Republic operations. We believe that offloading its non-core assets will not only reduce its mounting debt burden but will also boost its bottom line in the coming years.

Currently, Telefonica carries a Zacks Rank #3 (Hold).

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