Spanish incumbent to maintain controlling stake, operational control of infrastructure arm.

Telefonica on Tuesday agreed a €1.28 billion deal to sell a 40% stake in infrastructure arm Telxius to private equity firm KKR.

The deal represents an important achievement in the Spanish incumbent’s year-long plan to monetise its physical network assets.

"We are delighted to have KKR on board as a long-term investment partner. We believe their solid track record on the infrastructure business will help us achieve our common goals," said Telxius chairmand Guillermo Ansaldo.

Telxius was established in February 2016; it owns and operates 16,000 cell towers on behalf of Telefonica. It also manages an international network with approximately 65,000 kilometres of submarine fibre cables, 31,000 km of which are owned directly by Telxius.

Just months later, Telefonica detailed announced plans to monetise the assets via an initial public offering. It aimed to raise up to €1.5 billion by floating up to 40% of the unit. However, it abandoned that plan in September after Telefonica received what it considered inadequate indicative offers.

Earlier this month, a Reuters report claimed that Telefonica was in talks with several private equity firms, including KKR, as well as Singapore’s sovereign wealth fund, GIC, about a deal to sell up to 49% of Telxius.

Under the deal announced on Tuesday, KKR has agreed to acquire 24.8% of Telxius for €790 million, plus the option to purchase another 15.2% for €485 million. Provided the deal closes, the window to exercise this option will be the fourth quarter.

The transaction values Telxius at €3.19 billion, or €12.75 per share, which is in line with the valuation sought by Telefonica in the aborted IPO. Telefonica said the sale is in line with its plan to pay down its hefty net debt with proceeds generated by positive organic cash flow.

"The combination of Telefonica’s industrial expertise and KKR’s financial and operational support will help Telxius as it continues to scale and grow. We are confident that the exploding demand for mobile data, driven by the rise in 4K and virtual reality content, together with the need for reliable Internet infrastructure will help drive strong growth in the business," said KKR’s head of Spain and global co-head of infrastructure, Jesus Olmos.

Telefonica said it will maintain a majority stake in Telxius as well as operational control. Telefonica will also remain the anchor client for Telxius’ tower and cable businesses, and will continue to consolidate it on its balance sheet.

The deal is subject to customary regulatory approvals.