* Domestic revenues to fall in 2013, possibly beyond
* Telefonica bets on bundles to stem client losses
* Spain still generates nearly half of group cash flow
* Recession, unemployment to weigh on domestic market
By Clare Kane
MADRID, Feb 7 Telefonica faces an
uphill battle to repair its recession-hit Spanish business, even
after introducing discounted all-inclusive packages to stem
Stopping the rot in its home market, where over two million
mobile clients were lost last year and sales dropped 13 percent
in the first nine months, is central to attracting investors
back to Telefonica shares that fell 25 percent last year.
Despite the former monopoly's decade-long expansion into
over a dozen Latin American countries, Madrid-based Telefonica
still derives one third of operating income from Spain and
according to ratings agency Moody's, half of its cash flow.
Furthermore, a plan being studied by Telefonica to list up
to 15 percent of its Latin American business would leave
shareholders in the remaining group even more exposed to the
Spanish economy, making a successful commercial strategy
Telefonica hopes its new bundles dubbed "Fusion," which
include mobile and fixed calling, TV, and Internet will stem the
exodus of customers that began when it stopped subsidising
mobile phones for new contract customers last spring.
Such quadruple-play bundles are increasingly being used by
big telecom firms, especially in France, to lock up their client
bases under attack by low-cost challengers.
Analysts say moving existing customers to "Fusion" will drag
down margins, while attracting new clients will take time in a
depressed economy where unemployment is over 26 percent.
Macquarie investment bank expects Telefonica's sales in
Spain to fall 9.6 percent in 2013 and does not expect revenue to
stabilise until 2018.
Analysts expect the Spanish economy, in recession since the
end of 2011, to contract well into 2013.
"The underlying issue for Telefonica remains the economy and
unemployment in Spain," said John Delaney, director of mobile
research for Europe at market research firm IDC.
"Fusion is not a solution to that problem for Telefonica but
it is a way of mitigating...the loss of customers due to handset
subsidies, the need to try to avoid being dragged too far into
price slashing and the need to keep customers paying for all
four services when times are tough for the economy."
The bundles Telefonica introduced in October have been
matched by Orange and prompted Vodafone to offer
similar packages without TV. Fixed-broadband specialist Jazztel
has ratcheted up competition with a bundled offer with
up to 200 euros to cover switching fees.
Telefonica has been losing market share faster than its
rivals while virtual mobile operators, Orange and Teliasonera's
Yoigo are picking up its defectors. Virtual operators
like Jazztel do not have their own mobile networks but rent them
from others. Their share of the market rose to 8.8 percent in
November from 6.3 percent a year ago while Telefonica's share
shrank to 36.6 percent from 40 percent during that time.
Telefonica says it has signed up one million customers to
Fusion in under three months but has declined to say whether
they were new or existing clients.
Fusion will only increase revenues for Telefonica if it
helps the firm acquire new customers. Morgan Stanley predicts
average customer savings of 23 percent from migrating clients to
Fusion could dent the firm's domestic revenues by four percent.
Telefonica declined to make any comment on Fusion before
full-year results on Feb. 28.
"I'm still a bit more cautious on the outlook on the
domestic economy. If (Telefonica) can keep that profit line
stable they'd be doing well," said Andrea Williams, European
Equity fund manager at Royal London Asset Management, who has a
small holding in Telefonica.
In France, all-inclusive bundles promoted by Orange,
Vivendi's SFR and Bouygues Telecom are a
drain on profitability but have helped stop customers leaving
for low-cost rivals like Iliad.
Analysts said although Fusion may chip at revenues in the
near-term, it is more important for Telefonica to hang on to
clients in such a difficult economic environment.
As Telefonica seeks to stabilise Spain, it is also weighing
up a listing of its faster growing Latin American assets to
raise about six billion euros as part of its drive to cut debts
of 56 billion euros ($75.76 billion) as of September 2012.
Raymond James Euro Equities' Stephane Beyazian warned that
the move, following a similar listing last year of 20 percent of
Telefonica's German business, could put further pressure on
Telefonica shares because investors will be able to invest
directly in the most attractive parts of the business.
($1 = 0.7392 euros)
(Editing by Leila Abboud and Elaine Hardcastle)