July 25, 2013 / 6:31 AM / 7 years ago

UPDATE 2-Amid debt cutting, Telefonica braces for antitrust reviews

* First-half net profit 2.06 bln euros vs 1.94 bln poll

* Revenues down 7.8 percent, in line with forecasts

* Net debt falls below 50 billion euros

* Telefonica tests antitrust policy with Germany, Ireland deals

* COO says ‘compelling arguments’ exist to convince regulators (Adds comments on Germany, Ireland, shares, analyst)

MADRID, July 25 (Reuters) - Telecoms giant Telefonica cut borrowings to under 50 billion euros ($66 billion) in the first half, putting it on track to meet full-year debt targets even after its planned purchase of German mobile operator E-Plus.

Telefonica announced on Tuesday it planned to acquire Dutch rival KPN’s German unit for 8.1 billion euros in a deal to be financed through cash and shares despite a two-year drive to pay down debt.

Coming a month after a separate agreement to sell its Ireland business to local competitor Hutchison, the twin deals put Telefonica on course for a showdown with European antitrust watchdogs who are usually wary when markets consolidate down to three from four players.

Chief Operating Officer José María Álvarez-Pallete López said Telefonica had “compelling arguments” that the deals would help consumers and allow remaining operators to invest more in networks.

“There are too many players in Europe and the market needs to consolidate,” Pallete said on a results conference call.

“Consolidation will allow us to become a solid third-place operator that will be able to offer services that were impossible for us before, such as serving the corporate market.”

The Spanish company’s proposed acquisition of KPN’s E-Plus would broadly put it on an equal footing with Germany’s leaders Deutsche Telekom and Vodafone in terms of market share.

The Germany case is expected by many investors and sector executives to be a watershed moment for European telecoms since it would reduce the number of players in the region’s largest market with some 110 million subscribers.

Antitrust lawyers told Reuters that Telefonica would try win approval for its German expansion by pledging to divest spectrum and rent access on its networks to new virtual operators.

Scrutiny of the deal may take six to nine months.

Pallete added that Telefonica did not foresee significant hurdles to getting approval for its planned divestment of O2 Ireland to Hutchison by roughly year-end.

Telefonica shares were trading up 1.3 percent at 1444 GMT.

DOMESTIC PRESSURE

One of Europe’s most indebted telecom operators, Telefonica has been facing revenue pressure in its home market as Spain weathers a deep economic recession and high unemployment.

Net profit fell 0.9 percent to 2.06 billion euros in the first half to June from a year earlier, hit by declining revenues across the board but beating a Reuters poll for 1.94 billion euros, thanks to lower taxes and financing costs.

Revenues fell 7.8 percent to 28.56 billion euros, in line with forecasts.

First-half operating income before depreciation and amortisation (OIBDA), its core earnings, fell 9.7 percent to 9.42 billion euros, as weakness previously seen in recession-hit Spain extended to the group’s operations in the rest of Europe.

“The results are ahead of consensus albeit with the help of non-recurring items and the outlook has been reiterated,” Jefferies analysts wrote in a note.

“There is an emphasis in investing for growth in weak Brazil and Mexico EBITDA performances. In Europe, improved trends in Spain and the UK should offset weakness in Germany.”

Earnings from Latin America, which had previously largely offset weakness in its more mature European markets were also under pressure, with negative exchange rate effects also weighing.

Telefonica Brasil posted a 16 percent drop in quarterly profit on Wednesday, as revenue stagnated while it stepped up sales efforts to stabilise its broadband and pay-TV business.

Some of the cash needed for the E-Plus acquisition will come from hybrid and convertible debt, as well as a capital increase at Germany subsidiary Telefonica Deutschland.

The company has said the purchase will not affect its net debt to core earnings ratio. Moody’s on Thursday affirmed the group’s current credit rating, as did Fitch Ratings shortly after the E-Plus bid was announced on Tuesday.

Net debt was 49.8 billion euros at June 30, while operating cash flow, an indicator of disposable funds, totalled 5.52 billion euros. Telefonica has said it will resume dividend payments in November.

$1 = 0.7555 euros Reporting by Tracy Rucinski and Leila Abboud; Editing by Mark Potter and David Cowell

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