Telefonica sells Czech business as turns sights to Italy and Brazil

MADRID Tue Nov 5, 2013 8:29am EST

The logo of mobile phone operators O2 and Telefonica Czech Republic are seen on the company's technical support centre in Prague May 8, 2013. REUTERS/David W Cerny

The logo of mobile phone operators O2 and Telefonica Czech Republic are seen on the company's technical support centre in Prague May 8, 2013.

Credit: Reuters/David W Cerny

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MADRID (Reuters) - Telefonica (TEF.MC) has agreed to sell its Czech business for 2.47 billion euros ($3.3 billion), it said on Tuesday, the latest disposal for the Spanish group aimed at cutting debt and leaving it to focus on its Italian and Brazilian interests.

Telefonica is selling a 65.9 percent stake in Telefonica Czech Republic (SPTT.PR) at 305.60 crowns a share to investment group PPF, owned by Petr Kellner, the Czech Republic's richest man and ranked at 106 in Forbes' list of the world's wealthiest people.

Shares in Telefonica Czech Republic were down 2.5 percent at 304.20 crowns by 1242 GMT, with analysts saying PPF might try and buy out minority shareholders and de-list the shares.

Telefonica said it will remain a commercial partner in the Czech business for four years and still holds a 4.9 percent stake.

It will receive 2.06 billion euros in cash when the transaction is closed and the remaining 404 million euros will be paid over the next four years. A 260 million-euro dividend will also be paid to Telefonica by the Czech unit on November 11.

The Spanish group said the deal will help it cut its debt by 2.69 billion euros but it will require a 56 million-euro charge to earnings in the third quarter.

Telefonica aims to reduce its debts to under 47 billion euros by year-end from 49.8 billion at mid-year, and has sold a number of assets this year, including its Irish unit O2 for over $1 billion.

STRATEGIC MOVES

Analysts have said that Telefonica's sales of non-core assets will also free up capital for other deals, such as its proposed takeover of Telecom Italia (TLIT.MI) investment vehicle Telco, that holds a controlling stake in the Italian group. This in turn could lead to an eventual break-up of the Italian company's Brazilian business, Tim Participacoes (TIMP3.SA), which is a rival to Telefonica Brasil (VIVT3.SA).

Telecom Italia's management board is due to meet on Thursday for the first time since Telefonica agreed in September to gradually take over Telco, which is currently owned by Telefonica and a consortium of Italian banking and insurance companies.

"This (Czech) transaction reduces Telefonica's debt and leaves them flexible to participate in Brazilian consolidation and further investments in Europe," said Bernstein analyst Robin Bienenstock in a note to clients.

CZECH BATTLE

PPF will finance the deal through 1.4 billion euros worth of cash and a syndicated loan led by Societe Generale (SOGN.PA). It will also launch a mandatory tender offer for remaining Telefonica Czech Republic shares.

J&T Banka analyst Milan Vanicek said PPF would likely try to buy out minority shareholders in Telefonica Czech Republic and de-list the shares.

"(PPF can receive) nice cash flows, improve the efficiency of the company and potentially sell to other investors, which might be someone from China or Russia as PPF is interested in those countries," he said.

Telefonica Czech Republic posted a 23.5 percent decline in third-quarter net profit on Tuesday, to 1.35 billion crowns ($71 million). The company has been battling growing competition with Deutsche Telekom's (DTEGn.DE) T-Mobile and Vodafone (VOD.L), including a price war launched this year, eating into revenue in fixed-line and mobile services.

PPF had been looking for its next big deal after it agreed in January to sell out its 49 percent stake in an insurance joint venture with Italy's Generali (GASI.MI) for 2.5 billion euros.

With an estimated net worth of over $10 billion, Kellner got his start selling office supplies in the early 1990s before creating his investment fund that was able to buy the country's largest insurer Ceska Pojistovna in 1996.

PPF now owns assets worth 22.1 billion euros in banking, real estate, energy, mining and retail, reaching markets in central and eastern Europe to Russia and Asia.

PPF had wanted to enter the telecoms market but balked in September at joining an auction of radio frequencies for 4G wireless broadband networks, raising speculation it wanted to buy an existing operator. ($1=0.7402 euros) ($1=19.1184 Czech crowns)

($1 = 0.7402 euros)

(Additional reporting by Jason Hovet; Editing by Erica Billingham and Greg Mahlich)

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