* Telefonica to list German unit around end of month
* Promises 500 mln euro dividend payout in 2013
* Listing part of programme to reduce 57 bln euro debt
* Telefonica smallest player in Germany, room to grow
By Clare Kane and Alexander Hübner
MADRID/FRANKFURT, Oct 3 Telefonica SA
started the sale of up to 20 percent of its O2-branded German
unit, hoping to raise up to 1.5 billion euros ($2 billion) from
a share offering designed to help cut the Spanish group's huge
Announcing the intention to list its shares by the end of
the year, Telefonica Deutschland attempted to stoke interest by
saying it aims to pay a dividend next year totalling 500 million
euros ($647 million) - contrasting with its parent's decision to
cancel its payout for 2012.
The flotation is part of Telefonica's efforts to reduce its
57 billion euro debt pile and keep its prized investment-grade
credit rating, under threat from troubles in its home market.
The company must raise between 7 billion euros and 8 billion
a year through 2015 to cover debt repayments and risks rising
refinancing costs if its credit ratings are cut. Crisis-hit
Spain is expected to request a full state bailout as early as
Telefonica did not say on Wednesday how much of Telefonica
Deutschland it planned to float. The final size of the offer
will depend on investor demand and price, said two financial
sources, with marketing set to begin immediately for an IPO
expected to go ahead around the end of the month.
One of the sources had said previously Telefonica aimed to
list between 10 and 20 percent of Germany's smallest mobile
operator, which it has valued at 10 billion
The size of the offer may prove a key issue for investors,
who tend to shy away from small partial listings, especially
when they are under the control of a majority shareholder.
A listing of 10 percent could therefore be too small to attract
investors, said the sources.
One said the IPO should raise more than 1 billion euros but
is unlikely to top 1.5 billion, with Telefonica Deutschland
roughly valued at between 8 billion and 9 billion and only
existing shares to be sold.
The company's executives will begin a roadshow to potential
investors in around two weeks' time.
In Germany, 02 is the smallest mobile operator with roughly
16.4 percent of subscribers, trailing KPN's E-Plus,
Deutsche Telekom and Vodafone.
"I think they're going to have to price it very cheaply, and
they may well do because Telefonica needs the money," said Kevin
Lilley, who manages the Old Mutual European Equity Fund in
London. "Why would you be interested in the fourth player in
Germany when the rest of the sector looks pretty cheap anyway?"
Lilley's fund does not currently hold Telefonica shares.
However, some analysts and bankers say room for growth makes
Telefonica Deutschland a potentially attractive prospect, along
with the promised dividend.
"We are operating in one of Europe's strongest economies and
one of the biggest telecoms markets on the continent," Rene
Schuster, chief executive of Telefonica Deutschland, said.
Telefonica Deutschland's net debt stood at 1.1 billion euros
at the end of September.
The unit's 500 million euro dividend payout next year could
make the dividend yield as high as 9 percent, depending on the
final valuation of Telefonica Deutschland, though 6 to 7 percent
is more likely, according to the sources.
Will Draper, an analyst at Espirito Santo bank, questioned
whether the dividend would be enough to attract investors given
concerns over the liquidity of such minority stakes.
"It's a reasonable dividend, but it's not going to attract
yield investors," said Draper. "Nobody likes being a minority in
this kind of situation, especially if you are a 10 percent
minority, and especially if you are a minority to Telefonica."
Old Mutual's Lilley said investors would also be concerned
that Telefonica had not disclosed the lock-up period for the
shares, meaning it could list more of the unit in coming months.
Athole Skinner, analyst at Alliance Trust's European Equity
Fund, which has not held Telefonica shares for almost three
years and now only holds Kabel Deutschland in the sector, said
the fund would be unlikely to buy shares in O2 Germany.
"It would come down to valuation. In terms of the telco
sector, if anything I'd be more inclined to go for an incumbent
with more exposure to fixed line, given the proposed changes to
telecoms regulation announced this summer by the European
Commission," said Skinner.
European regulators changed tack in July and backed away
from forcing big telecom operators to charge smaller rivals less
for renting space on their networks.
Telefonica Deutschland's dividend promise comes after its
parent cancelled its own dividend for 2012, the first time it
has passed its payout since the Spanish Civil War in the 1930s.
Other telecom operators in Europe such as France Telecom,
KPN, and Telekom Austria have also sliced dividends this year.
On Tuesday credit rating agency Standard & Poor's said
Telefonica had the weakest credit profile of all of Europe's
seven former state telecom operators.