UPDATE 3-Telefonica profit drop overshadows debt reduction
* Earnings hit by weak Europe, Latam currencies
* Meets 47 bln euro debt target ahead of schedule
* Buys into Telecom Italia convertible bond (Adds amount bought into Telecom Italia bond, details)
By Julien Toyer
MADRID, Nov 8 (Reuters) - Spanish telecom group Telefonica on Friday posted a sharp drop in nine-months earnings, overshadowing its progress on cutting debt and efforts to revive a loss-making investment in Telecom Italia.
The company was hit hard by weakness in Spanish and Brazilian markets, which account for about half of its business, as well as by declining Latin American currencies.
Telefonica, which is one of Europe's most heavily indebted major companies, said it had met its target to cut debt below 47 billion euros ($62.9 billion) by the end of the year, three months early.
Scaled-down operations as a result of the sale of non-core assets in Europe and Latin America to help meet that target were another reason for falling revenue.
Telefonica on Thursday backed an overhaul of Telecom Italia's finances in a bid to reverse years of sliding growth at the Italian group and eventually recoup some of the 1.6 billion euros in writedowns it has taken on its investment. This included a 1.3 billion euro convertible bond that Telecom Italia sold on Friday.
The Spanish company indirectly owns about 10.5 percent of Telecom Italia through holding company Telco and has agreed to gradually secure control.
Telefonica said it bought 103 million euros of the bond, so that its Telecom Italia holding is not diluted when the debt is converted into shares in 2016.
Sources with knowledge of the matter said earlier this week that the group was tightening its grip over Telecom Italia to force a sale of its Brazilian business, which competes with Telefonica's own Vivo unit. Telefonica said on Friday it had no such plan for now.
Operating income in Brazil, where the Spanish group serves 91 million of its more than 300 million retail clients, fell 21 percent in the nine months to September, pressured by higher selling costs and a poorly performing fixed-line business.
In Europe, operating income fell 7.1 percent due to weak economies although improved margins in Spain and Britain helped cushion the fall.
Telefonica, which this week paid its first dividend in 18 months, said there were signs of stabilization in Europe and that its strategy of focusing on debt reduction would soon pay off.
Analysts welcomed the improvement of the operating margin in Spain, which jumped to 50.2 percent from 47.4 percent on the quarter as bundled packages of mobile, fixed line, broadband and TV services attracted cash-strapped consumers while the former monopoly cut costs.
"Telefonica's efficiency plan for Spain continues to bear fruits with the company achieving a strong profitability level in the quarter, but the headwinds on the revenue front continue to be quite strong," Espirito Santo analysts said in a note to clients.
The group's nine-month operating income before depreciation and amortization fell 10.7 percent to 14.1 billion euros, slightly below analysts' expectations. Net profit fell 9 percent to 3.15 billion euros, beating a forecast 3.0 billion euros.
The company said net debt was 46.10 billion euros at the end of September
Shares in Telefonica were flat in afternoon trading, outperforming a slightly lower STOXX Europe 600 Telecoms Index ($1 = 0.7472 euros) (Reporting by Julien Toyer; Editing by Erica Billingham)
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