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Shareholders miss out as Spanish incumbent decides to pay down debt based on organic cash flow.
Telefonica on Thursday announced it is reducing dividends for 2016 and 2017, as it seeks ways of paying down debt in the wake of its unsuccessful O2 UK sale and scrapped Telxius IPO.
The Spanish incumbent said that it now plans to reduce its hefty net debt based on positive organic cash flow generation. Consequently, Telefonica shareholders will receive €0.55 per share in 2016, down from €0.75 per share, and €0.40 per share next year.
This decision aims to "strengthen the balance sheet and intensify the organic deleverage, maintaining an attractive shareholder remuneration," said Telefonica executive chairman José María Álvarez-Pallete.
Telefonica’s net debt stood at €49.99 billion at the end of September, down from €52.57 billion in the prior quarter.
"[Telefonica’s] comments that ‘deleverage will now focus on organic cash flow generation’ is perhaps only valid right now because of the failure to go ahead with the O2 UK and Telxius sales," said Haitong Research, in an investor note.
Indeed, Telefonica had pinned its hopes of reducing its debt burden by selling O2 UK to 3UK parent CK Hutchison for £10.25 billion; however, the European Commission blocked the deal on competition grounds.
Telefonica then looked to raise funds by selling a stake in Telxius – its wholly-owned subsidiary that manages its global network infrastructure – in an IPO. However, that plan was abandoned after Telefonica said the indicative valuations it received were too low.
Telefonica is exploring a float of O2 UK, but according to Reuters, Telefonica UK CEO Mark Evans said on Thursday ruled out an IPO this year, and said the company will only push ahead with a float next year if the market conditions are right.
"In our view these operations and perhaps other options will continue to be necessary for the group’s leverage to become more adjusted to the actual situation in the sector," Haitong Research said.
The dividend cut was announced alongside Telefonica’s third quarter results.
Revenue in the three months to 30 September fell 5.9% year-on-year on a reported basis to €13.08 billion, as stable mobile service revenues were offset by falling handset revenues, driven by longer handset lifecycles.
Revenue in Latin America excluding Brazil fell 13.9% to €3.13 billion. In Brazil, revenue climbed 7.9% to €2.95 billion. In the U.K., revenue fell 17.1% to €1.68 billion, while Telefonica Deutschland saw revenue fall 5.2% to €1.88 billion. Telefonica’s domestic operation generated revenue of €3.17 billion, down 0.4% compared to last year.
Group operating income before depreciation and amortisation (OIBDA) inched down 1% year-on-year to €4.18 billion.
Telefonica ended September with 274.88 million mobile connections, down from 276.42 million a year earlier, and 21.74 million fixed broadband connections, up from 21.43 million. Fixed telephony customers fell to 38.91 million from 40.22 million, while pay TV subscribers increased to 8.40 million from 8.15 million.
