* Santander ahead in cash-raising strategy
* Both follow same path for slightly different reasons
* Telefonica could list LatAm business in 2013
* Santander to list Argentina after Mexico IPO
* Santander faring better, risks for both
By Clare Kane
MADRID, Nov 15 Spanish group Telefonica
is following in the footsteps of compatriot Banco Santander
by looking to squeeze cash out of its Latin American
business to help battle a grim recession at home.
Both Spanish corporate giants took advantage of cultural and
language links with Latin America by expanding aggressively into
the region in the 1990s, years before a real estate crash in
Spain triggered the country's worst recession in half a century.
Latin America accounts for more of Telefonica's revenues
than Europe, while half of Santander's profit comes from the
Now both companies are shedding assets outside their core
market and trimming balance sheets to show investors they can
keep their heads above water if the situation deteriorates in
Spain and Madrid has to request international aid.
"They're following similar paths but the starting point is
slightly different," said Fiona MacRae, who manages Alliance
Trust's European Equity Fund. She holds Santander shares but has
not had Telefonica stock for around two years.
"They're reaching their targets ... but you could argue that
they're selling part of their future growth."
Santander is ahead with the strategy of asset sales, stock
market listings, dividend cuts, a buying freeze and a buy-back
of subordinated debt, but Telefonica, with more than 50 billion
euros ($64 billion) of debt, is quickly following suit.
Santander is under regulatory pressure to raise core capital
because of Spain's banking crisis, while Telefonica must pare
debt to avoid losing its prized investment grade rating and the
spiralling financing costs that would accompany a downgrade.
Telefonica, which had 56 billion euros of debt at end-Sept.,
has said it will meet its year-end target leverage ratio of 2.35
times operating income before depreciation and amortisation.
PENALISED BY SPAIN
Both companies are rated two notches above junk by ratings
agencies Moody's and Standard and Poor's. If Spain, hovering one
notch above, is downgraded, they will fall too.
"Both Telefonica and Santander are being penalised in the
markets because of negative perception of Spain's sovereign
risk," said Jose Carlos Diez, economist at Intermoney Valores.
Santander's shares have risen 3 percent this year to date,
underperforming European peers which were up by 15 percent in
the same period, while Telefonica's 26 percent share price fall
year-to-date is steeper than the average for European
Similarities in strategy are not surprising given close ties
between the corporate and banking worlds in Spain. Telefonica
chief Cesar Alierta joined the company in 2000, after a career
in finance that included a stint on the board of the Madrid
Telefonica has followed the bank's lead on buying back
preference shares - something Santander first offered to do in
Dec. 2011 - and on dividend payments. While Santander has
offered shareholders the option to take dividends paid in shares
rather than cash, Telefonica scrapped its payout completely.
Santander sold a stake in its Chile business in Nov. 2011,
swiftly followed by a sale of its Colombian unit. Telefonica has
sold a number of assets this year, including its call centre
business Atento and part of its China Unicom stake.
Telefonica said it could seek a stock market listing for its
Latin American businesses in 2013, following a successful
flotation of 23 percent stake of its German business in October.
Overseas initial public offerings (IPOs) provide funds for
companies to feed into their core businesses and give them
alternative locations to raise money on the capital markets.
Santander raised $4 billion in September when it listed its
Mexican unit, the biggest ever initial public offering in the
country. Santander Mexico's Chief Executive Marcos Martinez said
none of the proceeds from the listing would go to Santander
The bank, which raised $8 billion from its Brazilian IPO in
2009, also plans to list businesses in Argentina and Britain.
Telefonica Latin America Chief Executive Santiago Fernandez
Valbuena, however, ruled out listing individual countries'
businesses, as Santander has done.
"The Latin American IPO approach is likely the simplest and
quickest thing to do next and will bring in significant
proceeds," a banking source told Reuters.
Telefonica's Brazilian business has a higher
credit rating than Telefonica S.A. and its share price has
increased around 3 percent over the last year.
Growth prospects may be rosier in Latin America than in
Spain - the region is expected to register 3.2 percent growth
this year, compared to a consensus 1.5 percent contraction in
Spain - but it is not immune to global economic jitters.
Brazilian authorities have cut interest rates to record
lows, offsetting concerns about a slowdown there, but investors
also worry about political instability in countries like
Argentina and Venezuela.
So far, Santander looks to be in a better position. But
risks lie ahead for both companies, not least the possibility
their core businesses could end up as holding companies for
subsidiaries around the world.
"The concerns you hear are that they are potentially selling
off the family silver," said Kevin Lilley, Old Mutual European
Equity Fund manager, who holds Santander stock but no
The telecoms firm also faces more fundamental business
challenges, with big customer losses in Spain and shifting
technologies globally. Santander, on the other hand, is
attracting more customers in Spain as worried Spaniards put
their money with the bigger healthier banks.
"Technology is absolutely fundamental for Telefonica's
business, and will require a lot of investment from the company.
Banking is still the same, it is just that it has been hit by
the collapsed real estate market," said Alberto Zumarraga,
managing director at Bilbao-based brokerage Mercagentes.
Alliance Trust's MacRae pointed out that Telefonica looked
backed into a corner compared to Santander.
"Santander has had to sell some assets, but at the same time
they've always had this strategy of having listed subsidiaries,"
"In Telefonica's case, they're shrinking and in Santander's
case, they're no longer expanding."
($1 = 0.7867 euro)
(Additional reporting by Jesus Aguado in Madrid and Leila
Abboud in Paris; Editing by Sonya Dowsett and Jon Hemming)