MADRID Telefonica hopes to raise around 1.5 billion euros ($2 billion) by selling part of its O2-branded German subsidiary on the stock market.
Europe's largest telecoms company by revenue has said it could also sell businesses in Latin America as it tries to cut its 58 billion euro debt pile and hang on to its prized investment-grade rating, under pressure from the euro crisis in its Spanish home market.
Telefonica plans to list up to 23.2 percent of its German subsidiary at between 5.25 euros and 6.50 euros per share, the company said on Tuesday, which at the mid-point values the stake at about 1.52 billion euros.
Espirito Santo analyst Will Draper said proceeds from this sale and another announced last week were not enough to bring Telefonica close to its target leverage ratio of 2.35 x earnings before interest, tax, depreciation and amortisation (EBITDA).
"It doesn't really scratch the surface," he said.
"Telefonica is going to have to make another significant disposal in the 2 to 3 billion euros range."
Telefonica agreed to sell its Atento call centre business to U.S. private equity firm Bain Capital for around 1 billion euros, including debt, last week and sold a stake in China Unicom earlier this year.
Telefonica Deutschland's initial public offering (IPO) of the stake in the company, values the whole German subsidiary at around 6.6 billion euros, at the mid-point of the price range.
Draper said the valuation equated to 5.6 times EBITDA, which was high compared with peers, meaning the company could struggle to achieve that kind of multiple.
In Germany, O2 is the smallest mobile operator with roughly 16.4 percent of subscribers, trailing KPN's E-Plus, Deutsche Telekom and Vodafone.
The German subsidiary had trade tax losses carried forward worth 11 billion euros as of December 31, 2011, the company said in the IPO prospectus published late Tuesday, adding the tax losses "could be forfeited" in the future at the company level. Telefonica Deutschland could not be reached for comment.
The O2 division said in the prospectus it is "content" with third-quarter results which matched internal expectations, citing continued growth in post-paid customers. Revenue from wireless services will keep growing, though at a lower rate than in previous quarters, according to the prospectus.
Spain's Telefonica reports earnings in November.
While Telefonica has lost customers in recession-hit Spain, the German mobile market is the biggest in Europe with almost 114 million users.
It offers growth potential as average revenue per user (ARPU) is lower than in other major European countries.
Deutsche Telekom, for instance, recorded ARPU of 16 euros in the second quarter, while that figure was 19 euros in the United Kingdom and 33 euros in the United States. O2 Germany's ARPU was just 13.9 euros.
"Future growth (at Telefonica Deutschland) will be driven by converting low end subscribers to higher contract packages and generally upselling data access (mobile internet)," said James Gautrey, Global Sector Specialist, Global Equities at Schroders.
"This is no mean feat however," he said.
After months of inactivity, the European IPO market has started to show signs of life. British insurer Direct Line and Germany's Talanx are among those whose shares have risen on stock market debuts this month.
But investors are choosy, seeking good growth prospects and attractive valuations. On Monday, Russia's Promsvyabank postponed its plans to list after failing to attract enough demand.
Telefonica Deutschland has attempted to woo investors with the prospect of a 500 million euro dividend next year, contrasting with its parent's decision to cancel its payout for 2012.
Telefonica will set the final price for the German listing on October 29, with the shares expected to begin trading on October 30. It will offer 225 million shares and a greenshoe, or overallotment, option of 33.75 million shares.
The offering is being run by JP Morgan and UBS. ($1 = 0.7730 euros)
(Additional reporting by Robert Hetz in Madrid, Kylie MacLellan and Chris Vellacott in London and Maria Sheahan in Frankfurt and Andreas Cremer in Berlin.; Editing by Erica Billingham and Carol Bishopric)