Telefonica in surprise Sogecable sale, Prisa hit

MADRID Fri May 9, 2008 2:44pm EDT

MADRID (Reuters) - Spanish telecommunications group Telefonica SA (TEF.MC) said on Friday it would sell its 16.8 percent stake in pay-TV company Sogecable SA SGCE.MC, an about face that sent shares in Sogecable's parent Prisa (PRS.MC) lower.

"This is an unpleasant surprise for Prisa because it means shelling out another 650 million euros ($1 billion) in its (Sogecable) bid," said an analyst at a foreign brokerage in Madrid.

The move set tongues wagging about Prisa's options in an upcoming reorganization of its TV business, now that it will not have the support of the euro zone's biggest telecoms company via Telefonica's holding.

Prisa's shares closed down 1.8 percent at 11.04 euros, off an earlier low of 10.42 euros. Analysts said it indicated the situation had perhaps not worsened radically for its newspapers-to-TV empire.

"It's a surprise, it increases the cost of the deal, but it doesn't change much beyond that. In the end, Prisa will merge with Sogecable and will likely want to sell its pay-TV business. But that's not going to happen in the short term," said Cristina Alvarez, analyst at ING in Madrid.

She argued Prisa still had to resolve a football rights conflict, currently in the courts, and confront a difficult economic climate with its Digital Plus pay-TV arm no longer growing to potential. These factors would curb a possible sale.

In a statement later Friday, Prisa said it expected to get 95 percent of Sogecable's shares, a result that would be "very satisfactory." It soon hoped to start the restructuring.

Prisa offered 28 euros per share for Sogecable late last year, a bid it was obliged to make after its stake in the unit topped 50 percent.

Another analyst estimated that, with this latest payment, Prisa's debt-to-EBITDA ratio would rise to 6.2 times from 3.8 at the end of 2007.

Prisa, the owner of national daily newspaper El Pais, is about to embark on an overhaul of its audiovisual interests, and many analysts anticipate it will eventually sell Digital Plus.

Some even speculated Telefonica itself was the natural buyer for Digital Plus, given its own pay-TV business, Imagenio.

But in the past few months, the outlook for television has changed due to tougher competition and a bleak outlook for advertising -- the mainstay of free TV -- as the economy weakens.

"Telefonica doesn't need a stake in a content company to guarantee it has content," said a telecoms analyst who requested anonymity.

With or without Telefonica, Prisa might have a hard time selling its pay-TV business because merger activity has all but dried up in the wake of the global credit crunch.

Prisa's bid for Sogecable was aimed at simply gaining more control of the business, and it initially spoke of keeping the unit listed.

But stock markets have fallen substantially since then, making Prisa's offer much more attractive than it expected.

Before Telefonica's announcement, Prisa was expected to get around 80 percent of Sogecable's shares in the bid, boosting its debt by more than 1 billion euros to between 4.2 billion and 4.4 billion, according to analysts.

Other analysts spoke of a possible clash between the two partners, which have a separate content agreement.

In February, Telefonica Chairman Cesar Alierta said the company was "delighted" with its Sogecable stake and would keep it.

($1=.6468 Euro)

(Reporting by Elisabeth O'Leary and Robert Hetz; Editing by David Hulmes/Jeffrey Benkoe)