October 27, 2016 / 7:40 AM / 3 years ago

UPDATE 2-Spain's Telefonica cuts dividend to speed up debt reduction

* Telefonica focuses on retaining investment grade rating

* Cash generated by company will go to pay down debt

* Does not want to be forced into poorly-timed asset sales (Adds quotes from conference call)

By Andrés González and Adrian Croft

MADRID, Oct 27 (Reuters) - Spanish telecoms group Telefonica , under pressure to reduce its debt after the sale of its British mobile business O2 UK was blocked by regulators, said on Thursday it was cutting its dividend to enable it to speed up repayment of loans.

Telefonica said it was focused on retaining its investment grade credit rating and would use cash generated by the business to pay down its 50 billion euro ($54.64 billion) debt rather than being forced into poorly-timed asset sales.

In line with that policy, the company said it would not list its British mobile subsidiary O2 UK in 2016, and would only go ahead in 2017 if market conditions were right.

“What we don’t want to have is to be depending on external factors to deleverage that are out of our control,” CEO Jose Maria Alvarez-Pallete said on a conference call with analysts.

After the European Commission blocked the sale of O2 UK to CK Hutchison Holdings for 10.3 billion pounds ($12.62 billion) in May, Telefonica had said it would either list or sell a stake in O2 UK before early 2017.

In September Telefonica cancelled a listing of Telxius, its telecom masts business, due to weak investor demand.

Telefonica said the dividend cut would save it around 1.9 billion euros and bring down its payout ratio to around 50 percent of free cash flow from above 90 percent.

Investment bank Jefferies estimated in a note however that it would only lead to a cash saving of 400 million euros a year which it said was “modest” when set against the company’s debt.

Telefonica had been the highest-yielding share on Spain’s blue-chip Ibex-35 index. The dividend cut sent its shares down 2.5 percent.

Chief Financial Officer Angel Vila said other means of reducing debt, such as asset sales, remained on the table but Telefonica would only go ahead when they made strategic sense.

Telefonica dropped a goal of achieving a leverage ratio (debt to operating income) of below 2.35 times by 2017, although Vila said it was feasible to reach a leverage ratio of 2.5 times in the medium term through cash generation alone.

Rating agency Moody’s said last week that Telefonica, which borrowed heavily to fund purchases overseas, may struggle to deliver on its debt-cutting ambitions if it did not change its dividend policy.

Moody’s said in May it could downgrade Telefonica’s Baa2 credit rating if there was no clear progress toward reducing its debt in 2017.

Moody’s analyst Carlos Winzer said on Thursday that the dividend cut was “another step towards cash preservation and deleveraging.”

Telefonica said debt had fallen to 50 billion euros at the end of September from 52.6 billion euros at the end of June.

Telefonica, which previously planned to pay a 0.75 euro per share dividend for 2016, said it would cut it to 0.55 euro per share for 2016 and to 0.40 euro per share against 2017 earnings.

Telefonica reported third-quarter revenues of 13.08 billion euros, slightly ahead of an average forecast of 13.07 billion euros in a Reuters poll of analysts, while core earnings (EBITDA) were 4.2 billion euros, higher than the 4.07 billion euros forecast. ($1 = 0.9152 euros) ($1 = 0.8163 pounds) (Editing by Susan Fenton and Alexandra Hudson)

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