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What happened? The Telefonica (-) CMD presentation has just concluded - shares are now -11%, but we expect to move lower given the size of the underlying FCF cuts (see below). See below for our 3x key takeaways - for more detail on the initial announcement and FCF cut this morning see here, and for our deeper dive on the leverage issues which TEF is still facing see Telefonica (-): Ready to push the reset button? . FCF downgrades - 40/50% for FY26, ~30% for FY28: As we noted this morning (see here), TEF''s ''new'' FCF guidance for ~EUR 3 bn excludes restructuring costs and VMO2 dividends. The restructuring costs are EUR 1bn this year and will grow next year - but mgmt. would not give guidance on how much the increase would be, nor say whether restructuring costs would fall EUR 1 bn during the guidance period (out to 2028). TEF did say that they expect to see step down from 2030, and that restructuring charges should be ''negligible'' from 2025). The company also confirmed that the FY26 FCF guidance includes EUR 300m one-off related to a tax refund. The lack of guidance on restructuring costs creates significant uncertainty around the ''real, recurring'' FCF for TEF in 2026. Given that restructuring charges have averages ~EUR 800m p.a. over the past 15 years, and TEF is embarking on a very significant restructuring programme in Spain, we would not be surprised to see restructuring charges of EUR 1.3-1.4 bn in 2026. This would imply a starting point for ''real, recurring'' FCF of ~EUR 1.3-1.4 bn. If we assume restructuring costs are still ~EUR 1 bn in 2028, the ''real recurring'' FCF number would be EUR 2 bn in that year as well. Taking all this together - we think that today''s guidance implies a 40/50% cut to cons FCF next year and ~30% cut in FY28 (guidance here also looks ambitious given the lower starting point in FY26). That leaves limited/ no scope for dividend growth in the coming years, assuming TEF wants to leverage by ~0.4x as guided. . Leverage/...
Telefonica SA
What happened? *Telefonica shares are currently -10% following new CMD guidance this year. We believe shares could trade lower given the size of the underlying consensus FCF cuts and lay out some more detailed thoughts below. How big is the FCF cut in FY26/ FY28? *FY26: TEF is guiding for EUR 2.9-3.0 bn under their ''new'' FCF definition (ex restructuring and VMO2 dividends). *TEF note that restructuring costs in FY26 will ''increase'' vs the EUR 1 bn this year - given they are calling it out explicitly, and this will be the first year of the cost-cutting programme, we assume this could be ~EUR 1.3bn. We also expect the VMO2 divi to be zeroed given the company''s high leverage (cons has ~EUR 200m in). So on a lfl basis we see ''real'' FCF EUR 1.6-1.7 bn - i.e. ~40% cut to cons FCF. *Finally, based on the 3Q25 slides (separate to the CMD) it appears that TEF now expect to receive the ~EUR 300m Colombian tax proceeds in 2026 (rather than 2025, hence d/grade to FY25 FCF). Our understanding is that this ~EUR300m one off is also included in the FY26 FCF definition - removing this would imply ''real, recurring'' FCF of EUR 1.3-1.4 bn. If correct, that compares to current consensus of EUR 2.6 bn FCF in 2026 - i.e. potentially up to a 50% cut to FY26 cons FCF. *FY28: Taking the ~EUR 2.7 bn starting point for FCF (under ''new'' definition) and applying 4% CAGR, we end up with ~EUR 3 bn FCF in 2028. *Then take off restructuring costs, this will be lower than in 2026 but we assume still around EUR 2 bn. We also assume no dividend payment from VMO2. *That implies ''real'' FCF of ~EUR 2 bn in FY28 vs. BBERG cons at ~EUR 2.8 bn - i.e. an ~30% cut to 2028 consensus FCF. Sense checking against dividend guidance *TEF has halved the dividend to EUR 0.15 - implying annual cash costs of ~EUR 850m. *Target payout of FCF (post restructuring/ VMO2 dividends etc) is 40-60%. This makes sense for FY26 (850/1650 = 51.5% payout) and also for FY28 (850/2000 = 42.5% payout). What is...
What happened? Telefonica has just released new guidance ahead of the CMD later today - key points are: *FCF forecasts: Key Slide below. TEF is lowering FY25 FCF guidance to EUR 1.9 bn (vs. EUR 2.6 bn previously, cons at EUR 2.4 bn) - in part due to timing of tax refunds etc. *The bigger downgrade is for outer years - TEF now targets EUR 2.9-3.0 bn in 2026 (and 3-5% CAGR out to 2028) but this excludes both restructuring costs (~EUR 1 bn p.a.) and VMO2 dividends (EUR 200m p.a.). *So the ''comparable'' FCF, vs old guidance, is now ~EUR 2.1-2.2 bn in 26 vs. cons at EUR 2.6 bn - i.e. ~20-30% cut to FCF. TEF also note that restructuring costs will increase further in 2026 before decreasing from 2027 onwards - hence the underlying FCF likely to be even lower in the near term. *Financial guidance: see table below - TEF is splitting the guidance period in two (25-28 and 29-30) with fatser growth expected in the latter period. Compared to the cons expectations outlined in our CMD preview, our initial take is that the revenue growth guidance is in line, EBITDA guidance slightly below, capex/sales in line and OpFCF Cagr slightly below. *Dividend: TEF is cutting the dividend to EUR 0.15 (from EUR 0.30) from 2026 onwards, and thereafter will target 40-60% payout of FCF *Leverage: TEF aims to reduce leverage from 2.9x today to ~2.5x by 2028 (note this definition excludes hybrids, employee commitments etc). *MandA: Lots of focus in the presentation on the need for in-market consolidation across TEF''s footprint, but no announcement today. *Other strategic priorities: Slide predominantly focused on improving customer relationship, growing B2C/B2B revenues and efficiency gains/ *3Q25 Results: Revenue/EBITDA slightly ahead of cons, FY25 FCF cut as referenced above BNPP Exane View: *We expect the FCF guidance and dividend cut to be the focus today and see TEF shares down 10-15% (despite recent weakness).
What happened? *Bloomberg reports this morning that Telefonica is planning to cut the dividend at next week''s CMD (November 4th), but that ''the company isn''t focused on any major deals at the moment'' and ''doesn''t plan any share offering for now'' *The article notes that TEF''s dividend yield will fall from 6.6% in 2025/26 (30c/ share) to 4.8%/5.2% in 2025/26 (implying 21c/share and 23c/share respectively - i.e. a 30%/23% cut to the FY25/26 dividends *It is unclear at this stage what the reports imply for the upcoming FY25 dividend payments (15c to be paid in December ''25, 15c to be paid in June ''26. *The reasons given for cutting the dividend are to reduce leverage and ''free cash for investments''. The article notes that focus areas at the CMD will be investment in networks, cybersecurity and defence, and ''new services''. TEF will also discuss cost-cutting plans and network-sharing deals. *The article also notes that ''future deals could potentially be funded fully or partially through capital increases'', even if this doesn''t come at the CMD next week BNPP Exane View: *We do not believe these plans go far enough, either to fix TEF''s balance sheet or provide capacity for future deals. The market may initially be relieved by the lower-than-expect divi cut and no capital raise - but we expect shares to move lower from here if next week''s event fails to answer the overarching questions on TEF''s capital structure *In our recent report Ready to push the reset button? we argued that a significant capital raise (EUR 10 bn), and 50% dividend cut would be needed to bring Telefonica''s adjusted leverage down from ~4x to ~3x. This would still leave TEF at the high end of telco peers, and the leverage adjustments we make include hybrids, employee commitments, and TEF''s proportionate share of VMO2 debt. *On our rough maths this morning, if the dividend cut is lower (~30%) and no capital raise is announced, TEF''s leverage would still be at ~3.2x by the end of the...
What happened? *VMO2 has just released standalone results, with revenue -1.5% vs. LBTYA consensus and EBITDA +2.4%. *Net add trends remain under pressure but improved relative to 2Q, with broadband declining -29k (vs. -51k last Q) and postpaid mobile declining -36k (vs. -74k last Q). *Note that revenue includes GBP52 from Daisy this Q (2% of total revenue, unclear how much in cons already) and the EBITDA number includes a 2.1% tailwind from ''handset related insurance recovery'' (though this was ''substantially offset by a provision for legal matters which did not impact cash in the quarter''). Taking all this together, we see the results as a miss on revenue and small beat on EBITDA vs. consensus. *FY25 guidance reiterated: revenue growth ex. handsets/nexfibre, EBITDA growth ex nexfibre, CAPEX GBP2.0-2.2 bn, Adjusted FCF of GBP350-400m. VMO2 note that they are reviewing the impact of the Daisy deal, which they expect to result in ~GBP135m incremental revenue but to have a ''broadly neutral'' impact on adj. EBITDA in 2025. *B2C Mobile: MSR grew 0.4% (vs. +0.2% last Q) VMO2 note that the sub losses were mainly driven by weaker B2B which was offset by wholesale sub gains. Consumer sub base is ''stable''. *B2C Fixed: Revenues declined -2.1% (vs. -0.9% last quarter), driven both by weaker sub numbers and ARPU reduction. Sub trends remained negative, but improved relative to last Q. We see all of this as evidence that the UK broadband market remains very challenging, with altnets becoming more aggressive - negative read-across for BT. *B2B Fixed: Revenue increased by +35% as a result of the Daisy merger (vs. -8.2% last quarter) - we look for more detail on underlying trends during the call today. *Adjusted EBITDA: increased 2.7% (vs. -0.4% last Q). On a guidance basis (ex nexfibre, Daisy etc) EBITDA grew +2.2% (vs. +1.1% last Q). *Leverage: VMO2 leverage, including vendor financing etc, sits at 5.3x - above the mid-term guidance range of 4-5x. BNPP Exane View: ...
TEF LBTYA LBTYA
What happened? *The FT reports this morning that VMO2 is in talks to acquire Netomnia, the UK''s 4th largest altnet (2.8m homes, 400k customers) for ~GBP2bn - see link here *The article notes that this would allow VMO2 to combine the infrastructure customer base both with their own coax/cable network, and that of Nexfibre (their FTTH JV) *Cityfibre (the UK''s largest altnet) has also reportedly approached Netomnia regarding a deal - which would be completed with cash and equity BNPP Exane View: *In our recent report BT (-): Jam tomorrow, but Marmite for now we argued that whilst altnet consolidation was likely, it would ultimately be a negative for BT (strengthening competitors near term, and creating a larger wholesale platform for other ISPs to switch to longer term) *This process now appears to be starting - and Netomnia''s relatively low customer penetration at present (14% vs. UK altnet average of ~20%) could increase significantly in partnership with either VMO2 or Cityfibre. *One key question will be the degree of overlap/ overbuild between the VMO2/ Cityfibre and Netomnia networks. We note a recent thinkbroadband report suggesting that the Netomnia/Cityfibre overlap today is between 20%-50% whereas for Cityfibre it is 0-10%. This likely includes all of VMO2''s cable network however, so there would still a capex saving opportunity from buying Netomnia (i.e. it means VMO2 will not need to pay to upgrade cable networks in these areas). *Beyond the immediate impact of this deal (if completed), these reports are likely to reignite the debate around UK altnet viability and the long term structure of the market. Netomnia may be a particularly attractive target given its scale - but we would expect to see follow on deals particularly if this move signals that VMO2 is looking to buy, rather than build new infrastructure. This with 1) embolden smaller altnets in the near term, encouraging them to push harder for customers with aggressive pricing in...
TEF''s CMD on November 4th, the first under new CEO Marc Murtra, has the potential to redefine the company for the next decade. We still believe that consensus expectations need to be lowered, and that a significant capital raise (up to EUR 10bn) is needed to fix TEF''s balance sheet once and for all. But whilst this leaves us cautious ahead of the event next week, we do see a clearer path to making TEF ''investable'' again. This report lays out why we believe a KPN-style ''reset'' is management''s best option, with new work on potential consolidation deals in Spain/Germany, and what consensus is expecting in terms of guidance next week (and why we see risk to the downside). Painful but necessary - we argue that a significant capital raise is management''s best option Despite the recent volume of MandA-related newsflow (mainly focused on Spain/Germany consolidation), our base case is not for TEF to announce a specific deal on the day of the CMD. Instead we expect mgmt. to focus on the standalone story first and, we hope, announce a capital raise which can be underpinned by the support of key shareholders. We believe that up to EUR 10bn would be needed to bring leverage down from ~4x to ~3x on a proportionate basis - though recent discussions suggest consensus expectations are significantly lower than this. As KPN found in 2013, going all-in to fix the balance sheet may be painful initially. But it would provide mgmt. with a clean slate to pursue future telco consolidation deals, and our analysis suggests significant synergy/market repair benefits from acquiring both 1and1 and Zegona. We remain below consensus - but TEF still have some positives to focus on at the CMD We forecast +1%/+2%/+3% revenue/EBITDAaL/OpFCF CAGR for the ''core'' TEF businesses which will be the focus for the CMD (Spain/Germany/Brazil). Our 2027 FCFE estimates are -16% below consensus given weaker EBITDAaL growth (Spain/Germany) and our expectation is that the VMO2 dividend will be cut to...
What happened? *This morning Handelsblatt reported the potential ''redefinition'' of the relationship between Telefonica and United Internet (who own the majority of 1and1, the German MVNO and broadband wholesale operator). The article quotes people familiar with the discussions. *The article highlights potential ''cooperation'' between the two parties, and notes that ''takeover is also being considered in the long term'', though talks are still at an early stage. The recent announcement that Telefonica''s German CEO, Markus Haas, would soon be departing the company is also highlighted and the article notes that this ''could facilitate a rapprochement'' between the two parties. *At time of writing 1and1 shares are +9%, United Internet is +8% and TEF is up 2%. BNPP Exane View: *This is the most explicit article to suggest that TEF may be looking to acquire 1and1/ United Internet and consolidate the German telco market - recent press reports have focused mainly on Spain where TEF is reportedly looking to acquire Zegona. *Telefonica will host a CMD on November 4th, with potential MandA deals and a capital raise being the focus of recent press reports (see here). Of the potential options available to Telefonica (acquiring 1and1 in Germany, Zegona in Spain or other bolt-on tech acquisitions), investors are most in favour of a German deal - we see this as the main reason for TEF shares outperforming today. *Any in-market telco consolidation deal is likely to take 18-24 months to be reviewed by the EC competition authorities, and whilst operators/ investors are optimistic for a more benign regulatory outcome, this is by no means a given. *We also note that recent press reports have suggested that deals in either German or Spain could take longer to come through - and believe that there is a higher likelihood of no deal being announced at the CMD itself (TEF may instead choose just to announce a capital raise), before mgmt. come back with more detailed plans in 2026 (any...
TEF UTDI 1U1
What happened? *On Friday afternoon Expansion, the Spanish newspaper, reported that Digi had hired advisors regarding a potential IPO of their Spanish business - see here: Digi contrata a Rothschild para sacar a Bolsa su negocio en Espana | Empresas Tecnologicas *The article suggests that the IPO could value the company at an Enterprise Value of EUR 2.5 bn, equivalent to ~9x EV/EBITDA (based on consensus forecasts of EUR 275-285m EBITDA in 2025, vs. EUR 153m in 2024) *The IPO proceeds would be ''to finance the company''s future growth in Spain'', and the article suggests that Digi Communications would still own a majority stake post IPO. BNPP Exane View: *As the article itself references, the timing of this announcement is particularly interesting given continued reports that Telefonica could be looking to consolidate the Spanish telco market as part of their upcoming strategic review (most recent reports suggesting that TEF could look to acquire Zegona). *One read the Digi''s IPO plans could be that the company is looking for cash to invest in potential remedies coming from a TEF-Zegona deal (which could be even more significant than those acquired from the Orange-MasMovil deal, given that TEF-Zegona''s combined market share would be even higher). *Alternatively, this could be a move by Digi to establish their own, independent valuation for the Spanish business ahead of any consolidation talks they are involved in directly - i.e. either as part of a TEF-Digi deal or Zegona-Digi deal. *Ultimately it is difficult to read too much into the reports at present. But it does seem like momentum behind some kind of Spanish deal is building ahead of TEF''s strategic review, and our view is that there is less support for this option amongst investors vs. a German consolidation deal (acquiring 1and1) given the potential for more regulatory scrutiny and less clear synergy benefits.
TEF delivered in line financials and better Spanish net adds at 2Q results. But VirginO2 trends remain challenging, and we see more downside risk in Germany where competition is intense, and we are yet to see the full impact of 1and1 MVNO losses. TEF continues to work on its strategic review, due to complete by year end, and today''s call suggests that there is a lot on the agenda (potential market consolidation efforts, tech investments, fixing the balance sheet). As detailed in our report Big plans - but who will pay for them? all these options need cash. Whilst we believe that the market could be supportive of a rights issues/ equity issuance to fund in-market consolidation deals (1and1/UTDI in Germany being the obvious example), regulatory approval remains uncertain, and we are more sceptical on other tech/ cybersecurity investments. We also still see downside risk to cons EBITDAaL/FCF estimates in the near term and remain UP rated. What did we learn from results? Whilst ''strategic review'' topics were the focus for the conference call, operational highlights today came from Spain (where TEF is delivering better net add growth but weaker ARPU trends, likely a sign of mix shift in the base), and the UK where VMO2 net adds remain weak. Has the investment case changed? Not yet - but strategic review will be important TEF mgmt. (and the Spanish/ Saudi governments who are significant indirect investors) have ambitious plans for the company. Today''s call suggested a ''quid pro quo'' - if regulators allow in- market telco consolidation and higher returns, the tech investment they crave will be forthcoming. That may be a persuasive argument - but telcos have tried and failed in this area before - and without structural change, the outlook for TEF''s core telco operations is challenging. Changes to estimates - increasing TP to EUR3.40 (from EUR3.20), reiterate Underperform We modestly raise our Spanish/German numbers and valuation, Brazil on an underlying...
What happened? The Telefonica 2Q25 conference call has just concluded, shares are now -0.5% (slightly worse than we initially expected) - possibly the result of weaker UK trends which only came through with VMO2 numbers (post TEF results this morning). See below for our 3x key takeaways and let us know if you''d like to discuss in more detail: . MandA ambitions - trying to read the tea leaves... CEO Marc Murtra was clear that limited detail would be provided ahead of the strategic review, which is due to complete in 2H25. But there were a few hints during the call, in our view. First, TEF spoke about the need to ''gain scale and consolidate'' the European market before making ''higher risk'' investments and investing in technology. Second, the company noted that whilst the balance sheet is important (and TEF is more leveraged than peers) they do not see this as a constraint for their strategic ambitions, that if they identify good targets then they expect the market will help them to finance them, and that whilst acquiring higher-leverage companies could be an issue for TEF they could also acquire assets with lower leverage. Third, TEF noted that data centre investments will be part of the strategic review and that ''things have changed'' with regards to cybersecurity/ IT investments to make them potentially more appealing - namely the reinvigorated focus on European strategic autonomy which coincides with a ramp up of defence/ cybersecurity spending. Many of these comments mirror those initially made at FY24 results, and subsequently reiterated in the Spanish press. Our high-level take however is that this could potentially suggest a preference for a 1and1 /United Internet deal (in market consolidation) rather than VMO2 (which would increase leverage), and it seems likely to us that TEF is moving towards increased tech investments/ MandA with the startegic review. Of these deals we expect investors would be more supportive of in-market German consolidation,...
What happened? *VMO2 has just released standalone results, with revenue -2.5% vs. LBTYA consensus and EBITDA -0.3% (we see these figures as more reliable than Telefonica results, released earlier). *Net add trends remain under pressure with broadband declining -51k (vs. -44k last Q) and postpaid mobile declining -74k (vs. -123k last Q). VMO2 note that the market remains ''highly competitive''. *FY25 guidance reiterated: revenue growth ex. handsets/nexfibre, EBITDA growth ex nexfibre, CAPEX GBP2.0-2.2 bn, Adjusted FCF of GBP350-400m. *B2C Mobile: MSR grew +0.2% (vs. +0.4% last Q), whilst low-margin handset revenues fell -5.2%. VMO2 note that the -74k sub losses were mainly driven by weaker B2B trends, with O2 monthly contract churn improving YoY to 1.1% in the quarters. *B2C Fixed: Revenues declined -0.9% (vs. +1.9% last quarter). Sub losses worsened (-51k vs. -44k last quarter) with VMO2 highlighting that customers were impacted by price increases this quarter (2Q has also been seasonally weaker in the past). The market also remains competitive with churn remaining elevated - we expect competition is coming both from altnets and BT (which is now back to positive broadband sub growth). ARPU growth has also slowed to flat (vs. +1.6% last Q ) - reflecting the impact of lower backbook price increases and also customer spin-down (still an issue in the competitive UK market). *B2B Fixed: Revenue declined -8.2% (vs. +-7.9% last quarter) driven by lower rental revenues. *Adjusted EBITDA: declined -0.4% (vs. 1.3% last Q). On a guidance basis (ex nexfibre) EBITDA grew +1.1% (vs. +0.8% last Q). *Leverage: VMO2 leverage, including vendor financing etc, sits at 5.53x - above the mid-term guidance range of 4-5x. BNPP Exane View: *Whilst financials/KPIs were broadly in line with cons expectations, the lack of revenue growth in 1H and continued net add weakness suggest that VMO2 will need to do more in 2H (including on the cost side) to provide reassurance on the mid...
What happened? We expect shares to be up small (0-1%) this morning on the back of the small financial beat and Spanish net add trends. *Telefonica group revenue and EBITDA came in line with consensus expectations this quarter. *Excluding TEF Brazil (reported yesterday), revenue was also in-line and EBITDAaL was small miss of -0.6% vs cons. *Group capex ex spectrum came in +13% vs. cons, and reported OpFCF came in -10% vs. cons, whilst FCF of EUR 527m compared to cons at EUR 370m Segmental detail *Spain: Service revenue came in-line with consensus expectations, with EBITDAaL a small beat of +0.6% - both growing at ~1% YoY (vs. +1.0%/+1.0% last Q). *Convergent/broadband/postpaid adds were +15k/+42k/131k vs. +5k/+26k/+79k last quarter. ARPU came in lower at EUR91.1 (vs EUR92.3 last qtr) and churn improved slightly from 0.9% last qtr to +0.8%. *Germany: Revenue/EBITDAaL came in +0.4%/-0.7% vs. cons and grew -2%/-9% YoY (vs. -2.0%/-2.0% last Q) *Postpaid mobile/ broadband net adds were +184k/-15k (vs. +164k/flat last Q) *Better Spanish numbers suggest TEF is holding up well against low-end price competition, and overall market health appears to be better than expected given solid MasOrange results yesterday as well. *UK VMO2 (non consolidated JV, ~16% of TEF EV) also reported 2Q revenue declines -5.5% (vs. -4.2% last Q) and EBITDA decline -0.7% (vs. -3.1% last Q). *The table below suggests that this implies revenue was -1.3% vs. cons and EBITDA -5.4% vs. cons. However these figures below have been manually adjusted for FX (TEF report in EUR m vs. cons in GBP m), and there are also some accounting differences. Speaking with TEF this morning, we would see VMO2 revenues and a small miss and EBITDA as a small beat vs cons - but wait for full VMO2 accounts to be released at 7:30am UKT before taking a final view. *On the net add trends side we see that both broadband (-51k) and postpaid (-74k) remain under pressure - albeit that this was already expected...
What happened? *Telefonica Brasil announced overnight that they would acquire the 50% stake in FiBrasil, currently owned by La Caisse, for BRL 850m (EUR 131m) *If approved TEF would fully control FiBrasil (75% through TEF Brasil and 25% through Telefonica Infra). No other financial details have been reported *FiBrasil currently operates in the neutral and independent wholesale fiber optic network sector in the Brazilian market and, by the end of 2024, was present in 151 cities, with 4.6 million homes passed. BNPP Exane View: *Whilst not a particularly large transaction in its own right, we believe that this deal could be a precursor for other FTTH JV acquisitions across Telefonica''s footprint (the company also has FTTH JVs in Spain, Germany and other LatAm markets *We expect this to be one of the areas discussed as part of Telefonica''s strategic review, due to complete by year end *Whilst difficult to assess the merits of the transaction given limited financial information available to assess valuation multiples, generally we see ''full ownership'' of infrastructure assets as a positive for operators in the industry
What happened? We have spoken to TEF IR ahead of 2Q25 results on Wednesday July 30th - there has been no change to guidance and we expect updates to be limited ahead of the conclusion of the strategic review (due in 2H25). Below we summarise key high level points by market *Spain - Competitive environment similar to previous quarters, with some easing of pressure in the low end of the market (Digi vs. Zegona/Lowi). On cost-cutting, TEF achieved EUR 270m from headcount reductions over the past 12 months (EUR 60-70m per quarter, a c. 5% tailwind to Spanish EBITDAaL growth per quarter). These annualise as of March 2025 and will be less of a tailwind in Q2, but TEF highlighted that there are other potential offsets to help (ongoing service revenue growth, copper shutdown savings, lower wage increases in FY25 vs. FY24). BNPPE forecasts stable service revenue growth QoQ with slightly lower EBITDAaL growth. *Germany - Market remains competitive but not incrementally more so vs Q1. Focus is on offsetting MVNO losses from 1and1 which are accelerating as the network migration continues, Freenet contract helps here and is a revenue sharing model. *UK - Competitive intensity remains high with altnets and MVNOs both winning share. VMO2 also negatively impacted by one touch switching, and highlight that mobile ''pounds and pence'' price increase already came through in Jan 2025 for half of the customer base, hence won''t be an incremental tailwind for this quarter *Brazil - Underlying market development remains strong despite FX headwinds
What happened? *As per FT reports this morning, Telefonica''s new CEO is considering investments in data centers and cybersecurity services to persuade European regulators to approve telecom mergers, aiming to lead consolidation in the continent. Summary of the key points in the article below: * Regulatory Advocacy: The company hopes that specific investments in digital infrastructure will convince the European Commission that fewer, larger telecoms operators can enhance the bloc''s technological resilience. * Consolidation Push: Telefonica, under chair Marc Murtra, is advocating for the reduction of four-player markets to three operators, a move recently permitted in the UK with Vodafone''s merger with Three. * Potential Acquisition: Telefonica is considering acquiring the remaining 50% of Virgin Media O2 from Liberty Global, valuing the business at GBP31.4 billion. * Geopolitical Context: The EU''s economic concerns and increased focus on cybersecurity, particularly in light of dependencies on the US and threats from China and Russia, provide an opportunity for Telefonica to push for more lenient competition regulation and invest in local cybersecurity alternatives. BNPP Exane View: *''What will TEF buy?'' has been one of the key questions from investors over the past few months - we have written on the potential scenarios here with more detail on a VMO2 takeover here. *In short, we (and most investors) remain sceptical on TEF''s ability to create value through a tech-focused MandA strategy. Whilst this may make sense from a strategic perspective for the Spanish govt/ EC looking to avoid smaller tech assets falling into the hands of US/ Asian tech giants (and we expect STC would also be supportive given their previous relationship with TelefonicaTech), there is little evidence of telcos differentiating/ adding value in this space. *The thrust of the article however is that these investments could be used as a precursor to securing a more supportive...
What happened? *Over the weekend, Bloomberg reported that Telefonica and MasOrange (50:50 JV between Orange Group and private equity) had held ''informal talks'' about acquiring Vodafone Spain (now owned by Zegona) *The article suggests that one option could be the breakup of the fixed and mobile businesses, and brands (with the Lowi sub brand going to MasOrange) to encourage regulatory approval. It is suggested that this could be a similar model to Brazil consolidation in 2020 (when Oi was split between the 3x remaining operators) *There is no comment in the article about valuation, aside from noting Zegona''s original acquisition price of EUR 5 bn, and the article notes that there are not yet any ''formal deliberations'' *Subsequently this morning, Spanish newspaper Expansion is reporting that TEF has mandated Spanish investment advisors AZ Capital to study the transaction BNPP Exane View: *We have seen an increasing number of media reports related to Telefonica MandA in recent weeks and months, ranging from Spanish consolidation to the potential acquisition of VMO2, outstanding minority stakes in FiberCo businesses, and technology businesses. Our overriding view is that all options are on the table in this early stage of the strategic review (due to conclude in 2H25), and the company is likely taking pitches on a wide range of deals. *Having said this, we see Spanish consolidation as one of the less likely options for a number of reasons: 1) Regulation: This would be the first time (in recent history at least) that an incumbent telco operator has been allowed to buy a challenger. TEF currently has 32%/26% broadband/mobile market share vs. Vodafone Spain at 14%/19% - hence any combination is likely to require regulatory approval. The example of Oi Brazil above is misleading - in that case Oi was the incumbent and working through bankruptcy proceedings, and even then the process took years to complete. 2) Asset split: Given the highly convergent...
A straightforward quarter, but VMO2 buyout could require a sizable equity raise... 1Q25 results were largely uneventful, with TEF''s new COO deferring most questions to the strategic review due to come in 2H25 (we expect September/October). But Bloomberg headlines this afternoon, suggesting that TEF is drawing up plans to take control of VMO2, saw shares close -3% today. As we detailed in our recent report Big plans - but who will pay for them? any such deal is likely to require a significant equity issuance... Telefonica currently has EUR 27bn of nominal debt and 2.7x leverage, but adding on hybrids (EUR 7.6bn), lease liabilities (EUR 8bn) and employee commitments (EUR 3.6bn) and this rises to ~3.8x. VMO2 has EUR 25.5bn of debt and lease obligations and 5.5x leverage. Hence if VMO2 were consolidated, TEF would need to pay down EUR 8bn of debt to keep leverage at the current 3.7x level (which we view as too high in any case). And that is before buying out the LBTYA minorities, which would cost an additional EUR 2.5bn (based on our valuation, press reports suggest this could be higher). There may well be a creative way for TEF to structure a deal (asset sales/NetCo transaction) - but most scenarios we consider still point towards some level of equity raise. For now of course nothing has been confirmed and TEF may ultimately decide to focus on other deals instead (e.g. acquiring 1and1 or tech businesses). What do we know that we didn''t know yesterday? Results themselves were relatively straightforward - Spanish trends in line with recent quarters, Germany performing better than expected (though full impact of price war/ 1and1 MVNO losses still to come) and HispAm negatively impacted by FX. Has the investment thesis changes? Not yet - still waiting on the strategic review Argentina/Peru are now reflected as discontinued operations and there is also EUR 1.7bn of (non cash) related translation effects and capital losses. There is no change to our EUR 3.20 TP.
Telefonica''s premium position in Spain/Brazil, and improvements at VMO2, sees the company perform relatively well in our STAMP survey this year. But Spain/Germany remain highly competitive and the BRL continues to depreciate, and our EBITDAaL/FCF forecasts remain materially below cons. Ultimately we view TEF''s problems as more structural, with 3.5x leverage on a fully adjusted basis and 1/3 of EBITDAaL still coming from LatAm. The new CEO is conducting a strategic review, with potential plans to lead tech/telco consolidation. But TEF will need to fix the balance sheet first, with a capital increase reportedly being one of the options on the table. Spain/ Brazil are good houses in bad neighbourhoods, but Germany remains weak STAMP revealed a mixed set of results for TEF, and as in previous years management appears to be doing a good job in difficult circumstances. Spanish NPS remains best-in-class on both the Movistar and O2 brands, however market churn remains high as more customers spin down to cheaper brands (particularly Digi/VOD). TEF Brasil is also in a strong position and VMO2 has improved from a very poor performance last year (blended NPS moving from -10 to +19), but Germany remains a weak spot. Overall we slightly lower estimates (EBITDAaL -1%/-3) with better Spanish trends offset by FX depreciation - our SOTP TP remains unchanged at EUR 3.20. What comes next depends on how ambitious TEF want to be... TEF''s new CEO installed with the support of the Spanish govt/ STC/ CriteriaCaixa, has highlighted that the company plans to play a ''leading part'' in both intra market and cross-border tech/telco consolidation. There are a few potential options; 1) acquiring 1and1 in Germany (synergy potential but expensive and with regulatory risk), 2) acquiring the 50% VMO2 stake from LBTYA (increainge leverage further) or 3) look to acquire tech assets (Murtra was formerly Indra Chairman). Given TEF''s challenging debt position, despite selling towers and some...
What happened? *In a surprise announcement on Saturday evening, TEF reported Mr Jose Maria Pallete had stepped down as both CEO and Chairman of Telefonica following a request from the BoD, which met earlier in the day *The BoD has appointed Mr. Marc Thomas Murtra Millar as the new CEO and Chairman. Millar is currently President of Indra (defence technology company, EUR 3 bn market cap and 28% owned by the Spanish govt). Mr. Millar has a background in management consulting and investment banking - but no telco experience as far as we are aware. Murtra is also a member of the Board of Trustees for La Caixa (Spanish bank which has a 10% stake in TEF). *The press release notes that it was a unanimous decision from the board ''to agree on the orderly renewal of the Company''s chairmanship, in order to adapt it to its new shareholding structure'' The BoD has also thanks Pallete for his 9 years of service at CEO and 26 years at Telefonica Group. *As a reminder, during 2023/24 SEPI (the investment arm of the Spanish govt) built a 10% stake in Telefonica, as did CriteriaCaixa. Both were intended to be a counterbalance to Saudi Telecom (which owns 5% of TEF outright and another 5% in options) *See here for the PR from Telefonica, here for the FT, and here for the latest El Confidencial article on the news. BNPP Exane View: *This is a major surprise both to us and, press reports would suggest, to Telefonica''s management itself. FT reports suggest that Mr Pallete was only called to the Spanish PM''s office on Saturday afternoon to be informed of the decision. Pallete had met with incoming EC Competition Commissioner Teresa Ribera as recently as last Wednesday, with a LinkedIn post on Friday suggesting he had been meeting with regional teams to discuss the 2025 strategy. *We expect the news to be taken negatively by investors given 1) the uncertainty created around TEF''s strategy under a new CEO, 2) risks to the FY25 mid-term and potentially even dividend...
Spanish EBITDAaL miss and FX headwinds a challenge to mid term guidance Whilst TEF has announced a number of supportive Spanish FiberCo deals in recent weeks, domestic EBITDAaL continues to decline at -1.7% YoY and consensus still looks to be underestimating the impact of higher lease costs. At the same time, whilst underlying commercial performance in Brazil remains strong, the 10% depreciation YTD in the Brazilian Real will likely be a meaningful headwind to revenue/EBITDA guidance - even if mgmt. argue that they are better-hedged at the FCF level. We reiterate our Underperform rating with a slightly lower EUR 3.20 TP. What do we know that we didn''t know last week? TEF has entered into FiberCo/wholesale deals with both MasOrange and Vodafone/Zegona (each covering 3.5m homes). We see this as a positive which should limit overbuild risk in the longer term, but note that Digi and others remain aggressive on frontbook pricing (see Pricing Tracker 2Q24). It was also announced that TEF are in discussions to sell their Colombian asset to Millicom and could receive USD 400m for their equity stake, but we do not expect this to be meaningful in the context of overall group debt and leverage. Has the investment thesis changed? No We remain cautious on Spanish competition and the domestic EBITDAaL outlook, and expect to see further consensus downgrades. In Germany we do not believe that the new Freenet partnership can offset 1and1 MVNO losses, and in the UK we highlight slower than expected commercial momentum at the VirginO2 JV. We are more bullish on TEF Brasil, but FX remains a headwind. In order for TEF to hit its (reiterated) FY24 guidance for 10% FCF terms the company appears to rely on a materially positive working capital swing in 2H24 - this can''t continue forever. Changes to estimates - lowering TP to EUR 3.20 (from EUR 3.30) We update post results, also incorporating new estimates for VMO2 and updating FX.
We have adjusted our estimates post 1Q24 results We do not consider the changes to be material; our rating is unchanged.
Domestic trends improving, but VMO2 faces challenges Telefonica''s 4Q23 results delivered better-than expected trends in Spain and positive upgrades on the FY24 FCF outlook, albeit driven more by lower capex than EBITDAaL growth. With the Orange-Masmovil deal approved earlier this week, the question is now whether Digi will be able to be more aggressive with spectrum/ NRA remedies received. We await the upcoming results from our STAMP 2024 survey to gain more insight, but ultimately remain sceptical that the long-hoped-for ''market repair'' scenario can materialise in Spain. The VMO2 joint venture reported last week with results and guidance disappointing the market, and underlying dividend payments (ex CTIL proceeds) cut by 75%. We have more questions around the mid-term growth outlook and ability to upstream cash as synergies wind down, network investments continue and leverage remains at the high - a key debate for both Telefonica and Liberty Global. What do we know that we didn''t know last week? TEF already provided mid-term guidance at the November CMD (see here), so the most meaningful updates came on VMO2 where LBTYA provided a deep dive on strategy last week (see here). Within TEF''s own results, Spain and Brazil were better than expected, whilst trends in Germany were weaker (TEF now owns 94% of TEF DE post the initial tender offer). Has the investment thesis changed? VMO2 increasingly in focus We remain Underperform on TEF, and our 2026 FCF estimate (EUR2.8bn) under TEF''s new definition remains below consensus and mgmt. target for c.EUR3.0 bn. Changes to estimates We update both TEF and TEF DE estimates post results, also adjusting for FX and new forecasts for VMEDO2. Our TEF SOTP-based TP increases slightly to EUR3.30 (from EUR3.20), whilst our TEF DE target price remains EUR 2.35 (in line with the tender offer price).
Telefonica SA Telefonica Deutschland Holding AG
We hosted Sebastian Jung, Head of Digital Transformation at one of Germany''s largest Housing Associations, to discuss impact of changes to the Nebenkostenprivileg regulation and the future of FTTH in Germany. Below we summarise key takeaways, with more detailed QandA notes inside. TV law change presents significant downside risk to telco operators, particularly VOD (-) Currently 12m German households automatically pay for basic TV via rent, paid to their Housing Associations (HA). This has been a highly profitable relationship, but changing regulations will ban this from July 2024. Telco operators will need to sign contracts directly with the consumer; Vodafone estimates EUR800m of revenue exposure, and BNPPE assumes a 14% hit to FCF. A complex and fragmented picture, but relationship between operators and HAs is key Mr. Jung sees the long-standing relationship between telcos and the HAs as an advantage when trying to retain TV customers. For example the ''vast majority'' of customers have maintained a telco relationship in some recent partnerships vs the 35-65% retention rate previously cited by VOD. But this typically results in lower pricing (for the customer) and more marketing costs. It also opens the market up to more competition, likely meaning that DT/Freenet/others will win share over time. FTTH is the next battleground - Vodafone has the connections, but DT has the money FTTH coverage is limited in HA areas at present (10%), and we are seeing a ''race'' between operators looking to work with the HAs. This can be done either by entering a revenue share deal or by doing a ''sale and leaseback'' (telcos build the fibre and then sell to the HAs). Mr. Jung notes a strong preference for the ''sale and leaseback'' model. DT is particularly active on promoting FTTH at present, Vodafone less so. But VOD does have a ''head start'' in terms of relationships and is more flexible in negotiations. Our view is that that in order to retain current share, VOD...
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Last week Telefonica announced the launch of an offer for its German subsidiary, released its Q3 numbers and presented its guidance for 2024-26. Regarding TEF Deutschland, we believe that Telefonica has launched a very timely and good offer. The new strategic plan is not that surprising, but the future regular growth in FCF is promising. We believe the current dividend to be secure (it could even be increased from 2024). We maintain our opinion at buy on the stock.
At Telefonica''s upcoming CMD on 8th Nov, its first in over a decade, management had intended to lay out a path for sustainable FCF growth. But the recent loss of the 1and1 MVNO contract in Germany, increasing FTTH overbuild, and uncertainty around Spanish consolidation mean that target looks challenging. Whilst company-defined FCF will hit EUR4bn this year, we see this falling to EUR3.6bn on a lfl basis by 2026e and just EUR2.2bn on an underlying basis. Downgrade to U/P, EUR3.2 TP. Spain remains the focus, but we see pressure from multiple angles TEF certainly has some positives to highlight, and completing the FTTH rollout will unlock cost savings and drive lower capex. But continued FTTH overbuild is an ongoing headwind to wholesale revenues. On the retail side, competition is increasing again and TEF''s backbook price increases have already been eroded by customer down-spinning. We also still see downside risk from EC''s decision on Spanish consolidation - particularly if structural remedies go to Digi (Be careful what you wish for...). Our 2023e/24e/25e OpFCF forecasts are -1%/-4%/-7% for Telefonica Spain vs. VA cons. TEF DE (-) wholesale losses still underappreciated, VMEDO2 dividend appears unsustainable We estimate the loss of 1and1''s MVNO business to VOD (see Checkmate) implies a EUR400m FCF hit to TEF DE. Consensus likely only models in half of this, but assumptions that new MVNO contracts can plug the gap are overly optimistic in our view. Continued altnet growth in the UK presents a challenge to VMEDO2, but also the opportunity to use cash for small-scale MandA. Either way we believe that the uncovered dividend being upstreamed to TEF is likely to be reduced. Real cash conversion likely to disappoint, leverage issues and FX risk warrant a discount We expect TEF to deliver EUR4.2bn of FCF this year, pre spectrum. But multiple headwinds and the VMEDO2 divi cut mean that we see this declining to EUR3.6bn by 2026e (-8.5% below VA cons...
1and1''s surprise announcement that they plan to switch their MVNO deal from TEF DE to Vodafone has sent shockwaves through the German market. In this report we look at the strategic rationale for all parties, impact on German market dynamics, sector read-x and stock implications. This deal could be a gamechanger for UTDI/1and1, strengthening network economics and their position as a potential target (or acquirer) in a future mobile consolidation deal. We upgrade both names to Outperform with the caveat that risk/reward range is wide and earnings visibility remains limited. Wholesale revenue losses will be a major negative for TEF DE - we lower our TP by 50% and reiterate UP with 40% downside - and also TEF Group (=). VOD (=) will be criticised for the MVNO offer, but we do not see this as a bad deal and whilst competition will increase we still see DT (+) as relatively well insulated. 5G MVNO contract is a gamechanger for 1and1, and the worst-case scenario for TEF DE 1and1''s new 15 year MVNO deal with VOD has secured 5G access and (we believe) cheaper, more ''fixed'' wholesale payment terms. It is not clear whether this will be enough to support 1and1''s own network rollout, but it removes another overhang and leaves 1and1 in a much stronger position for any future negotiations with TEF DE, VOD, or others. Based on our analysis and conversations with the operators, we expect that the EUR700m in wholesale payments currently being paid by 1and1 to TEF DE will fully switch to VOD from mid-2025. That implies up to EUR 400 m hit to TEF DE/ TEF Group pre-tax FCF (74%/ 13% of total) which is difficult to offset. We zero the TEF DE dividend and halve our TP - this is also likely to derail TEF group FCF targets to be announced at the November CMD. Negative market impact, but not as bad as some fear - the deal still makes sense for VOD 1and1 could now push harder for subs, but with cash needed to build the network, a sizeable customer base and low pricing already we would...
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FCF growth promises, but we see cracks emerging in Spain Telefonica''s new guide for EUR 4 bn of FCF, and announcement of a CMD this November to outline plans for future growth, have sparked optimism. We expect new guidance to focus on cost reduction and lower capex as the transition from copper to fibre finally comes to an end, and TEF will be the first EU incumbent to reap these rewards. But we believe the bigger debates remain 1) performance of the domestic business and 2) the path back to sustainable deleveraging. On both points we find reasons to be more concerned following these results. What do we know that we didn''t on Wednesday? Spanish revenue and reported EBITDA came in line with expectations, but growth at the EBITDAaL level (not guided for by the company) actually worsened to -5% YoY (-4% last quarter). On the operational side the slowdown in ARPU growth to +1.3% from +1.7%, despite benefitting from a full quarter of price increases, should raise concerns around the ongoing spindown effect. Finally whilst FCFaL came in ahead of expectations (supported by higher VMEDO2 dividends) leverage was also higher, and we expect TEF''s fully-adjusted leverage to still be 3.5x at year end. Has the investment case changed? Management looking to reframe the debate... Putting these updates to one side, we believe mgmt. can point to some solid cost/capex opportunities at the CMD in November and we already forecast EUR 4 bn in FCF over the next few years. But there remain many factors beyond their control - not least the outcome of Spanish consolidation (decision due in September/November) where we believe most outcomes are likely to be negative for TEF - see Be careful what you wish for... for more. Changes to estimates We make limited changes to estimates - Spain/ Germany are broadly unchanged whilst earnings upgrades in Brazil are offset by cuts to the other HispAm businesses. Our 3 year cumulative FCF forecasts increase by c. 2%, and our EUR...
Telefonica released a solid Q2 with the expected 3.3% revenue growth but a good EBITDA progression of 3.5% despite higher energy costs and personnel expenses. We are confident about the group’s objectives for 2023 and therefore believe the 2023 dividend to be secure. We even think it could be increased from 2024. Our target price is probably too ambitious in the short term and a price of €4.6 is more reasonable (implying a 6.5% dividend yield).
Consolidation. Few words evoke that heady mix of falling risk and rising reward. But if markets were simple, we''d be sipping Mai Tais on the beach. Instead, we''re poring over the Orange/Masmovil merger, the likely EC response, market impacts, and telco sensitivities and strategies. It doesn''t make pretty reading. We expect structural remedies, sparking a chain reaction in the Spanish market as challengers like Digi barge into MasMovil''s niche, seizing customers and pressuring revenues. With consensus market repair hopes looking bullish, what next? We''d embrace the risk at Orange, as it locks in a partner and synergies. Vodafone has most to lose, but Spain is now a sideshow. At Telefonica, the retail side looks protected, but wholesale fees are vulnerable to a reshaped market - downgrade to Neutral.
TEF VOD ORA ORA
Telefonica released a mixed Q1 with a solid 4.9% yoy organic revenue growth but an EBITDA up by only 1.1% due to higher energy costs and personnel expenses. Capex was however down by 0.7% and EBITDA less Capex was therefore up by 2.1%. Cash flow should grow modestly in 2023 and we are thus comfortable with the dividend for 2023. We maintain our opinion at buy on the stock.
TEF has long faced intense domestic competition whilst labouring under a heavy debt pile. But as we unveil the results of our STAMP 2023 survey it looks like a comeback is on the cards....and with stronger pricing power this year we double upgrade to Outperform, TP EUR 4.40. It''s not all good news however, and we also downgrade Telefonica Deutschland to Underperform with a TP EUR2.5. TEF has seen strong STAMP improvements in Spain/Brazil, with VMEDO2 supporting FCF In Spain, Movistar has consolidated its position as the go-to premium operator. We are now more optimistic on the ''stickiness'' of recent backbook price increases. Furthermore, we find ongoing weakness at Vodafone/Orange Spain (both also raising prices) and the O2 sub-brand providing a buffer against low-end competition. In Brazil the Vivo brand has also seen strong improvements in brand perception and NPS, and whilst the UK results for VMEDO2 are more mixed TEF should benefit from 15% backbook price increases which are supporting a higher dividend upstream. Germany remains a weak spot with specific risks - downgrading TEF DE to Underperform Our findings are not universally good for TEF however, and in Germany O2 has slipped backwards in terms of NPS and brand perception. Despite their failure to roll out a network thus far, 1and1 look stronger in the value segment which we think will dampen TEF DE sub growth. We also see risks from a potential Huawei ban in Germany, whilst higher lease costs and uncertainty around wholesale revenues remain longer term risks. Having significantly outperformed over the past 12m, we see risk-reward now skewed to the downside and we downgrade to Underperform with c10% downside. How have we changed our estimates? Spain inflecting, dividend / leverage risks receding We increase both subscriber and ARPU forecasts for TEF Spain, and whilst we maintain medium term concerns over Spanish wholesale/B2B risk, we now expect to see a positive inflection in Spanish...
Germany is Europe''s largest telecom market and plays a critical role in the investment outlook for several large cap telcos. In the last 5Y it has enjoyed sector leading service revenue and EBITDAaL growth. But in recent quarters this outperformance has faded, and whilst frontbook prices have improved the German operators have generally been reluctant to take up backbook prices in the face of cost inflation (Trends Tracker). So, are we now at an inflection point in the fortunes for the German telecom market and what does this mean for the operators exposed? Our work focuses on four key topics that will determine the outlook for the market in 2023 We focus on four key topics that we believe will dictate the fortunes of the German telecom market in the next 12-24 months; 1) broadband pricing trends and FTTH overbuild dynamics, 2) the impact of the end of the TV rental privilege in 2024, 3) the structural growth drivers of the mobile market, including a review of mobile pricing trends and unique analysis on mobile data monetisation Vodafone and 1and1''s network build, 4) the potential cost of upcoming spectrum renewals / auction. Germany is ''good enough'' even with slower growth - but Nebenkostenprivileg is a risk to VOD The German market remains broadly rational, with fixed/mobile price trends improving on frontbook. But broadband sub growth is slowing post COVID, we see limited support for backbook rises, and overbuild is accelerating. The days of consistently above-average revenue growth are likely resigned to history, and we forecast just +1% service revenue CAGR over the next 5Y, half the level of past 5Y. Key stock implications: Outperform DT/ Freenet, Underperform Vodafone Vodafone (-, 75p) faces the biggest headwinds and weakest growth outlook in Germany - for more on the headwinds from TV sub losses and constraints on data monetisation see our accompanying note Time to push the reset button. DT (+) remains our preferred large cap name - we...
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How will Spanish companies and the economy fare in 2023? Find out at our 13th Spain Investor Days conference, on Wednesday 11th and Thursday 12th January. In collaboration with our partners, we will be hosting CEOs from 46 of the country''s leading companies, plus an exceptional list of keynote speakers: King Felipe VI of Spain; Prime Minister Pedro Sanchez; Vice Prime Ministers Nadia Calvino and Teresa Ribera; Foreign Minister Jose Manuel Albares Bueno; the Governor of the Bank of Spain Pablo Hernandez de Cos; and Chairman of CNMV Rodrigo Buenaventura. For details on all the meetings, plenary sessions and keynote speeches, see the programme attached.
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A lot has happened this year... but the focus is shifting back to Spain in 2023 Telefonica remains complicated - but the most important question to our mind is whether Spain can return to sustainable growth after a near decade-long stretch of EBITDA declines. With consolidation on the horizon next year as Orange/MasMovil seek merger approval, and inflation-linked price increases dominating recent headlines, investors are daring to hope for a change in fortune. But a closer look at recent market developments would suggest that many of the same structural challenges persist - network overbuild is increasing, TEF''s price premium looks increasingly fragile in the current macro environment, and wage/ lease cost inflation threatens to more than wipe out any improvement in revenue growth. Our new analysis leaves us 4% below Visible Alpha consensus for Spanish EBITDA next year, and nearly 20% below on FCFaL at group level. With TEF still 3.6x leveraged on a fully adjusted basis and interest rates rising, we see little room for error - and plenty of downside if Spanish trends continue to disappoint. Price increases are unlikely to be enough to offset domestic cost headwinds Our review of Spanish pricing trends, our STAMP survey results, plus macro and regulator databases show just how challenging the domestic picture is for TEF. While we do expect price increases to have a positive impact, we would note that the drop through to ARPU has been limited in the past. The threat from altnets is still growing, even before merger remedies which could allow them to compete more aggressively (see Musical Chairs), and we expect TEF to lose both retail and wholesale share as overbuild increases. TEF will also face material wage, lease and other cost headwinds - leading us to forecast -1%/-4% revenue/EBITDA CAGR for Spain over the next 3Y. TEF has benefitted from FX and asset sales, but leverage remains the major issue We update estimates across the board, with...
Telefonica released a solid Q3 with 3.8% yoy organic revenue growth and EBITDA up by 3.1% yoy. Telefonica is still a Spanish story, with high potential in the UK and Brazil, plus solid assets in Germany. The dividend yield is 8.5% despite a steady increase in FCF in the future. We maintain our strong Buy on the stock (which lost 25% in Sept-Oct and has recovered by 7.5% in the past week).
A solid Q2 with a 5.2% yoy organic revenue growth and an EBITDA up by 3.4% despite increasing energy costs in Spain. Telefonica is still mostly a Spanish story, with high potential in the UK and Brazil, plus solid assets in Germany. The dividend yield is 6.8% despite a steady increase in FCF in the future. We maintain our Buy. However, in the short term, the recent rotation toward quality growth stocks at the expense of telcos is likely to continue.
Organic Q1 revenue growth was in line with expectations at 3.2% yoy, while EBITDA was up by only 2.1% yoy and lfl due to a significant increase in the cost of energy and the higher growth in lower margin revenue in Spain. EBITDA less capex was however good, up by 6.4% yoy due to a 4.9% decline in capex. The dividend yield is 6.45%, above the 4% for the sector best in class: we maintain our Buy.
Spanish consolidation appears likely - but only two can tango Spanish consolidation hopes have seen TEF, VOD and Orange outperform significantly in recent months. But whilst all players are jostling to be part of a deal, it is MasMovil that holds most of the cards, and is likely to reap the majority of the EUR4bn in synergies on offer. We believe that a MasMovil/Vodafone combination remains most likely, with MasMovil the likely acquirer and the majority of savings driven by the decommissioning of Vodafone''s cable network in Spain (raising bigger questions for VOD''s strategy in Germany/Netherlands). Both TEF and Orange stand to lose significant wholesale revenues, and we remain sceptical on any prospect of ''market repair''. Vodafone (+) is under most pressure to do a deal, and MasMovil is the most likely acquirer The revenue outlook for Spain remains one of the worst in Europe, and it is no surprise that management teams are looking to market consolidation as a panacea. A full range of deal structures (VOD-MAS, ORA-MAS, VOD-ORA) have been speculated in recent weeks, and Vodafone appears to be under most pressure to negotiate as market share continues to fall and customers drain away from the cable network towards FTTH. We believe that Vodafone''s best option is to either decommission the legacy cable network or fully upgrade to FTTH (as MasMovil is doing with Euskaltel), and accept wholesaler status in Spain. Doing this as part of a deal with MasMovil could unlock EUR4bn of synergies, worth 6p/ share for VOD and providing an exit route from one of the group''s most challenging markets. But there is also potential for an Orange-MasMovil combination which would leave Vodafone stranded in a tough market. Whilst Vodafone are rightly holding out for a higher price, they should also be careful not to overplay their hand. Risk is skewed to the downside for both Telefonica (-) and Orange (=) Most consolidation scenarios would see TEF and Orange lose...
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What''s in store for Spain this year? Find out at our virtual Spain Investor Days conference, this Wednesday and Thursday, the 12 and 13 January. In collaboration with our partners, we will be hosting CEOs from 44 of the country''s leading companies, plus the Governor of the Bank of Spain, the Mayor of Madrid and government ministers. In short, it''s an event that should be top of the agenda for any investor assessing the prospects in Spain in 2022 and beyond. For details on all the meetings, plenary sessions and keynote speeches, see the programme on page attached.
TEF IAG REP ELE ACX EBRO ENC BKT ANA PSG MEL ACS IDR RED CAF VID ENG FER TRE COL RJF CABK FDR ROVI MRL CIE ADX EDR AENA GEST HOME CASH UNI 0H4K 0OIQ 0HAC 0R4Y 0H7O 0ILK 0DZC 0RKF 0NYH EDR 0EBQ 0K96 0N9G 0P2N 0J6V 0HA9 0RID 0RB1 0ILL 0QVM 0Q8P 0RI5 0NQG 0MKT VID 6503 GETVF APPSN
More headwinds ahead TEF''s reported 3Q21 results ultimately did little to move the investor debate forwards. The main focus is still on Spanish trends which remain weak, with service revenues -0.5%, EBITDA -9% (partly due to headwinds from higher electricity costs) and continued broadband sub losses. Our latest pricing and portability trackers suggest that competition has worsened further in October, and with Spanish inflation now running at 5% we expect cost pressures to continue into 2022. TEF has performed better in other markets - Germany delivered a beat-and-raise plus the announcement of a new MVNO contract, TEF Brasil also beat local consensus and delivered a cheaper-than-expected spectrum auction result, and we remain positive on the VirginO2 JV which could still benefit from further wholesale deals (see Digging into the Future of Fibre). But with several potentially negative upcoming catalysts (1and1 network rollout announcement for TEF DE, La Liga football rights auction in Spain) we remain Underperform on both names. What do we know that we didn''t last week? On the positive side, TEF DE announced a new MVNO deal with Lebara which we estimate will provide a c. +1% boost to top line from 2023. The negative updates were mainly in Spain, where higher energy costs were a 3% drag on EBITDA this quarter and likely to remain a headwind into next year as well. There was no new update from management on the potential sale of the Spanish FTTH network, and whilst this may be a headline risk in the near term we see limited upside from the sale and leaseback of an already mature infrastructure asset with limited opportunity to improve utilisation. Our overall investment thesis is unchanged - for latest views see Telefonica: New structure, old problems. Changes to estimates We update for results, FX and to reflect the outcome of the recent Brazilian spectrum. Whilst we increase TEF DE revenues to reflect the impact of the new Lebara deal,...
Q3 was globally in line with expectations. Things are still tough in Spain but Germany is a very strong asset while Brazil and the UK are deploying fibre networks which should bear juicy fruits in the future. Hispam operates as an autonomous company which could soon be sold as a whole or piecemeal. Our significant upside is commensurate with the incredibly low levels reached one year ago. The stock has partly recovered but is still 35% under its pre-COVID-19 levels.
Spain remains under pressure, UK opportunity best played through LBTYA (+, USD35) The big announcement today is that the new VirginO2 JV plans to replace their existing cable footprint (14.3 mn homes) with FTTH and is working on new wholesale/ coinvestment partnerships to expand even further. This is a development we pre-empted with our report Digging into the Future of Fibre, which makes strategic sense and could lead to more value creation longer term. But we believe owning Liberty Global is a much better way of gaining exposure, given that the JV accounts for c. 50% of LBTYA FCF vs. just 20% at Telefonica. Meanwhile, we expect ongoing pressure on the Spanish business to be the main driver of Telefonica performance. What do we know that we didn''t know on Wednesday? Spanish EBITDA missed by 2.4%, net add trends remain negative and ARPU declines accelerated to -3% YoY. Whilst management pointed to the start of the football season, some roaming recovery and ''more for more'' price increases as supportive for ARPU improvement in 2H, the guide on 3Q EBITDA remains cautious and we believe that EBITDA margins are likely to be structurally lower in future thanks to the increasing share of digital and IT revenues in the mix. There was little new detail on the MandA front - TEF have sold the majority of infrastructure assets already and reducing investment in HispAm appears to be the priority in the absence of further asset sales. Has the investment thesis changed? Not really Our recent report New structure, old problems provides a detailed overview of each of TEF''s businesses and updates for all recent and upcoming MandA transactions (including in Brazil). These results bring more evidence that Spanish customers are shifting to lower end of the market - negative for TEF and a key driver of our Underperform thesis, whilst the UK FTTH upgrade strategy is in line with our expectations as well. Changes to estimates We make modest underlying estimate...
The Q2 numbers are slightly better than expected. Telefonica has also upgraded its outlook for 2021. The dividend cut of last year, the recent sale of its telecommunications towers division in Europe and in Latin America for €7.7bn to American Tower, the merger with Virgin in the UK, the reduction in net debt and a quite correct H1 performance should indeed help restore market confidence. We maintain our opinion at Buy on the stock.
Telefonica management have had a busy year - selling towers and LatAm assets and striking an attractive deal to merge O2UK with Virgin Media''s cable business. These efforts have been appreciated by shareholders and reduced leverage concerns, but the rump of businesses left behind continue to face challenges. Whilst TEF has strengthened its position in some markets, we believe that the downside risks in Spain continue to be underappreciated which will put more pressure on TEF''s dividend and leverage. Reiterate Underperform, EUR 3.30 TP. A strong effort on asset sales - but more needs to be done TEF''s asset sales will reduce net debt by EUR 9 bn by the end of 2021, almost 50% of the current market cap. But making all the relevant adjustments (leases, hybrids, employee commitments etc.) and the total liabilities will still sit at EUR 44 bn - 3.6x pro forma EBITDA. Leverage has not actually fallen, ongoing cash flow is not enough to cover the dividend, and there is little left to sell. Ultimately, TEF''s position remains highly dependent on Spanish performance and LatAm FX. Spain still looks challenging - introducing new price and portability trackers Investors are increasingly challenging our long-term bearish view on the Spanish market, pointing to recent market consolidation, some positive price moves and more upbeat management commentary. To test the thesis we have introduced a new proprietary price tracker looking at both high and low end convergent bundles, updated portability and Google Trends analysis, and revised our STAMP 2021 survey. Whilst we come away slightly less cautious than before, our mid term EBITDA forecasts remain below consensus and we see risk around the upcoming La Liga auction. O2UK looks promising, but TEF only gets half the benefit Our new report looks into the new O2UK-VMED business, a much stronger competitor to BT which now has flexibility to accelerate FTTH rollout into areas where both companies are well...
Fighting a difficult battle against Spanish price deflation Telefonica management are trying to do a lot of the right things - asset disposals, reduced exposure to HispAm and taking the lead with ''more for more'' price increases in the home market. But the headwinds in Spain are more structural (5x players, low cost to build FTTH, high legacy prices), and thus far competitors do not seem to have gotten the message on price and brand rationality. That was evidenced again this quarter with TEF losing more convergent subs and seeing accelerated ARPU declines - a direct result of the shift to the O2 brand. B2B revenues look to be improving post-COVID and TEF surprised to the upside on EBITDA (both in Spain and for the group), but there is little here to change our fundamental view on the outlook. What do we know today that we didn''t know yesterday? Weaker Spanish trends were to be expected following the recent portability data (which is also negative for April), and TEF confirmed that they are on track to complete the O2/VMED merger and Telxius sale in 2Q21. During the conference call management indicated their support for further FTTH expansions in the UK which will likely add pressure to BT (-). Has the investment thesis changed? No As laid out in our recent report How Lowi can you go?, we expect the Spanish market to remain highly competitive for some time with 50% of subscribers polled in our recent STAMP 2021 survey looking to switch to cheaper sub-brands, which typically come at a 20-30% price discount. We still expect leverage to remain a concern for investors even after the Telxius asset sale which will leave TEF at c. 3.7x ND/EBITDA on a fully adjusted basis (note that the O2UK JV will deconsolidate the business and reduce absolute debt, but not reported leverage). TEF trades at an 8% equity FCF yield but just a 3.6% unlevered yield, and is still unattractive in our view. Changes to estimates We modestly increase FCF estimates in...
In contrast to most markets, STAMP 2021 showed that the Spanish telco market has become even more price conscious this year with subscribers continuing to shift to lower-end brands. Overall customer satisfaction levels remain high, but sub brands have seen the biggest improvement with 27% of churners looking to move to the likes of O2, Lowi and MasMovil. That is good news for Euskaltel''s ''Virgin'' challenger brand, and based on the new survey data we have materially increased our forecasts and double-upgraded to Outperform in The 1, 3 and 5-year view: Re-opening. But it also means that competition will remain fierce for the rest of the market - this trends is not driven by just one operator and we believe that Telefonica (-) remains most vulnerable. Mas brands, menos dinero Our STAMP 2021 survey shows that Spaniards are clearly shifting towards mid and low-end brands as price sensitivity increases - hardly surprising given that sub-brands now offer excellent quality service at a c. 30% discount to legacy packages. We also track average market pricing, portability data and Google trends, and combining this analysis suggest that Spanish ARPUs could fall by another 10% across the major operators as subs shift to sub-brands. A strong start for the new Virgin brand We were initially sceptical that Euskaltel''s ''Virgin'' brand could carve a niche in a crowded market. But less than one year post-launch, 7% of broadband churners are looking to switch to Virgin, NPS data is strong and the brand is well positioned for a more price-conscious customer base. We remain cautious on Euskaltel''s legacy cable business, but Virgin growth means that EBITDA can increase 50% by 2025 and Spanish market consolidation could be another positive catalyst. Is market consolidation really good for Telefonica? TEF is +36% over the past 6 months, and many see a Vodafone-MasMovil deal as the key to market repair and higher prices longer term. But price erosion is more a...
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Q4 numbers were in line with expectations and quite reassuring. Telefonica has, however, preferred to cut its dividend by 25% (at €0.3 vs €0.4 previously) to preserve its cash flow while its investments will remain substantial in the coming years. So after the recent sale of its telecommunications towers division in Europe and in Latin America for €7.7bn to American Tower, this cautious cut could indeed help restore market confidence. We maintain our opinion at Buy on the stock.
Telefonica announced this morning that its subsidiary Telxius has signed an agreement with American Tower for the sale of its towers division in Europe for €7.7bn. It’s indeed an impressive price and TEF succumbed logically to the sirens of American Tower to reduce its debt a little more. We maintain our opinion at Buy on the stock.
What''s in store for Spain this year? Find out at our virtual Spain Investor Days conference, this Wednesday and Thursday, the 13 and 14 January. In collaboration with our partners, we will be hosting CEOs from 34 of the country''s leading companies, the Governor of the Bank of Spain, the Mayor of Madrid, government ministers, and His Majesty the King of Spain himself. In short, it''s an event that should be top of the agenda for any investor assessing the prospects in Spain in 2021 and beyond. For details on all the meetings, plenary sessions and keynote speeches, see the programme on page attached.
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Telefonica''s investment case remains tied to leverage concerns 3Q20 results came in slightly ahead of consensus (as with last quarter), however once again TEF has closed -5% reflecting: 1) continued leverage concerns; 2) a lukewarm reaction to the new German FTTH vehicle; and 3) worse than expected ''other'' EBITDA drag. TEF can still deliver solid FCF this year, as spectrum auctions have been delayed and the company has pulled back on capex in all markets. But we do not believe the dividend can be covered on an ongoing basis and without meaningful asset sales in HispAm management will need to focus on debt reduction. We cut our dividend to zero in 2021 (and the years thereafter) as a result. We also lower mid-term EBITDA/FCF forecasts by -1%/-2%, and cut our TP to EUR 2.60, remaining Underperform rated. What do we know now that we didn''t know on Wednesday? Telefonica confirmed the details of their German FTTH vehicle, and whilst the announcement was broadly in line with what has been reported recently in the press TEF''s own investment in the vehicle (EUR 400 mn through TEF Infra, EUR 100 mn through TEF DE) is lower than many expected. There was little incremental change to report in the key operating segments, however TEF''s ''other'' EBITDA drag (including items such as restructuring and central costs) was worse than expected, and is likely to drive further consensus downgrades. Has the thesis changed? Not really As laid out in our report Running out of growth, Telefonica faces significant structural challenges in the Spanish market which are being compounded by LatAm FX pressures and a challenging leverage position. On a reported basis revenue/EBITDA was -11%/-15% this quarter, and whilst some COVID impacts are likely to be transitory ND/EBITDA is nearing 4x and TEF has EUR 50 bn of debt/liabilities on a fully adjusted basis - vs. a market cap of c. EUR 15 bn. Changes to estimates: we lower mid-term EBITDA/FCF by -1%/-2%, and cut the...
Telefónica remains on track to deliver its 2020 outlook of flat EBITDA-capex yoy in organic terms but… at constant currency. The Forex headwind is however a storm in Brazil (-30% yoy). The stock is trading at a 55% discount to its February level. The dividend yield is nearly 15% reflecting the market’s major concern about its sustainability. Even if the group ends up lowering its dividend due to this Forex storm… we maintain our Buy opinion.
