Next Wednesday, November 8, Telefónica celebrates its Capital Markets Day. Under this anglicism, hides one of the most important days in the recent history of the company and of the presidency of José María Álvarez-Pallete, with the presentation of a strategic plan that will extend until 2026 and that must provide the tools to resolve several challenges on the horizon and give new flights to the action.
However, the weeks leading up to this day have diverted the focus from the event. First, due to the still open outcome of the Saudi entry into the company’s capital and the lack of official notification to materialize its 9.9% shareholding. And secondly, due to the possibility that this movement moves the Government to use the State Industrial Participation Company (SEPI) as a lever to enter the company’s board. “A responsible Government has to analyze all operations,” said the Minister of Economic Affairs, Nadia Calviño, last Friday, who repeated that Telefónica is the most strategic company in Spain. If the interest is merely strategic, it can be questioned by cases such as Indra, a company that since the forced replacement by SEPI of Fernando Abril Martorell in 2021 has experienced two years of corporate crisis with a leadership in constant instability, disoriented investors and regulators and paralysis. in strategic projects. This precedent and the Government’s terrible relations with the business and financial world are the basis for concern about the sense in which the Government uses the word “strategic” to refer to Telefónica.
How relevant these movements are for analysts and investors will be seen next Wednesday, a day in which the company wants to focus the focus on its business and which it has been preparing for a long time. The day will be, above all, marked by the vision for the future in a hectic and complicated time for the European telecommunications market. «It is quite necessary. It has been a long time since there have been medium- and long-term perspectives for the company,” says Álvaro del Pozo, an analyst at Banco Sabadell.
Beyond the shareholding dance, the approach to this strategic plan has not been without setbacks for Telefónica at a business level. In August, the company lost its main wholesale customer in Germany (1
Added to this is the increasingly real possibility that Digi, its star client in Spain, will acquire numerous Orange and MásMóvil infrastructures, including the mobile network, as part of the merger, which will reduce the bill it pays to Telefónica. for using their networks.
This cocktail has caused several cuts in the objective valuation assigned to the stock by the main banks. The last of them was Deutsche Bank, which reduced its valuation of the company from 4.6 euros to 4.1 euros last Wednesday. All in all, 37.5% of analysts advise buying the value and 46.9% recommend holding it.
The cascade of reviews by these experts has focused mainly on two closely connected elements that have a key role reserved in the next plan: the dividend and free cash flow (free cash flow in financial jargon). This second measure reflects the money that a company generates minus its expenses, that is, Telefónica’s ability to meet its debt maturities and remunerate the shareholder. Entities such as JP Morgan advocate cutting the dividend to protect against an increase in the cost of debt. «Telefónica continues to have high leverage. “It should reduce it,” GVC Gaesco analyst Juan Peña explains to EL MUNDO. However, he also remembers that management maintains a “high commitment” to the dividend, one of the attractions of the stock, which he reinforced when announcing the investor day by establishing “rewarding the shareholder” as one of its pillars.
Álvarez-Pallete’s team set out to reduce the group’s high liabilities and has achieved this, relying on several transformational transactions such as the merger in the United Kingdom and the sale of Telxius’ telecommunications towers, as well as other smaller agreements.
For Del Pozo, the company must explain the actions it plans to take to guarantee that cash flow while reducing debt in “an environment of high interest rates and with prospects currently subject to quite a few risks.”
Telefónica has not given too many clues about the alternatives it will present. One option that it has been executing is the partial or total sale of assets, a quick way to inject cash into cash, but for which the options on the table are limited. “A very strong deleveraging effort has already been made,” says the Banco Sabadell analyst.
On the table is the entry of an investor in Telefónica Tech, a central pillar of the group’s strategy. Furthermore, Telefónica has been entering KKR into joint fiber optic subsidiaries in several Latin American countries, with Peru as the last affected market. There are still several Latin American markets susceptible to an operation of these characteristics, with Argentina as the main candidate, although it is always difficult to close agreements in a country as unstable as the southern one. Beyond that, there are other assets of the group that could be divested, such as the 25% that Telefónica owns in the data center company Nabiax.
Given the limitation at the inorganic level, the main focus is on Telefónica’s future proposals to accelerate its growth in each of its markets, as well as cutting costs. On the second point there is greater clarity. The group is expected to present at the event a new voluntary departure plan for Spain for up to 5,000 workers in the coming years. Added to this will be the shutdown of the copper network, which will bring significant energy savings. In addition, the company is also taking numerous steps in Latin America to share its mobile networks with other operators, a new action that would reduce the investments necessary to provide services in these markets.
Regarding business evolution, one of the group’s focuses is to redouble its commitment to its fastest-growing verticals such as Telefónica Tech and the business for companies, reinforced by the digital services provided by the group.
Regarding the future strategy in specific markets, Peña, for example, points out that it is difficult to present a roadmap in Spain without knowing the details that the merger operation of MásMóvil and Orange will bring. For his part, Del Pozo shows his interest in seeing how the group’s exposure to Latin America evolves, as well as its vision in the United Kingdom, a subsidiary that is generating a lot of cash for the group through dividends, but whose market is also in the process of consolidation and deployment of investments with the extension of fiber.
In Telefónica’s favor, it has a debt with long-term maturities (until 2026, about 3,000 million annually on average) and some of the setbacks suffered, such as that of the wholesale contract in Germany, will not have an effect on the accounts until 2025, unless 1
Looking to the future, one of the conditions continues to be the restrictive European policy for the sector, “unless Brussels realizes the importance of creating large European operators,” Peña resigns.
