Pallete claims the “strategic” value of Telefónica in the face of the entry of the Saudi STC and the interest of the SEPI

The president of Telefónica, José María Álvarez-Pallete, defended this Wednesday the “strategic” value of Telefónica in the face of the interest of the Saudi operator STC and the investment arm of the Government, SEPI, in the Spanish company. “We agree that we are strategic, and we are strategic at the European level. The sector is strategic,” he stated when asked about it after Telefónica’s first major conclave with investors since 2012. He has also taken the opportunity to demand a complete deregulation of the sector in the EU. The objective of the meeting, held in Madrid, was the presentation of the group’s new strategic plan, which will mark its management until 2026, and which is focused on maintaining the current dividend and improving profitability.

“We are the key to the connectivity of the future. What is not understood is that we are regulated with rules from the last century. Therefore the only thing we ask is one thing, it is that we be deregulated, that we be allowed to compete. That we be allowed to compete on equal terms like any other player, because the rules that gave rise to this regulation have become obsolete,” said Álvarez-Pallete. The question about the interest of STC and SEPI in strategic companies such as Telefónica has been asked by an attendee once the broadcast of the event – open only to investors, not to the press – has ended through the company’s website, which has A video with the answer was later distributed.

Little else was said at the meeting about the role that STC, which has taken 4.9% of the capital and has options to acquire another 5%, and SEPI, which has admitted that it is exploring an eventual purchase of shares in the company, 26 years after it was privatized. The operation of the Saudi state company is pending authorization from the Government, considering Telefónica as strategic and also having contracts with the Ministry of Defense. The entry of the State in capital would seek to balance the representation of Spanish shareholders in Telefónica.

For two hours, Álvarez-Pallete and the group’s main executives presented the strategic plan, dubbed GPS (for growth, profitability and sustainability), at Telefónica’s headquarters and answered questions from attendees. The company’s leadership has promised shareholders a minimum annual cash payment of 0.30 euros per share for the next four years – in total, about 7,000 million euros – and has announced an annual growth of 1% in income. and 2% of the operating result (Ebitda). It has also recognized a “progressive” reduction in investments over sales, which will be below 12% in 2026, two points below the 2023 target.

Álvarez-Pallete has referred to Telefónica as a “supercomputer.” “We are not just a telecommunications company,” he said. The digital services unit, Telefónica Tech, will see its revenue grow the most between 2023 and 2026, at an average annual rate of 18%, up to 3,000 million euros. The company also forecasts significant growth for Telefónica Infra, the unit created in 2019 to surface and develop the value of the company’s telecommunications infrastructure. Thus, he predicts that his “fiber to the home footprint” will go from being present in 20 million current homes to 30 million in 2026.

Although the objectives for the next fiscal year will be specified in February, Telefónica anticipates that cash generation will grow by around 10% in 2024 and that investments over sales will drop by 14%. “This scenario will be based on both the decrease in capital intensity and the group’s ambition to increase revenues and Ebitda,” according to a statement released before Investor Day. During the period that the plan lasts, income will grow at a rate of 1% annually and the gross operating result (EBITDA) by 2%. Net financial debt will continue to shrink, according to the company, and will reach a ratio between 2.2 and 2.5 times EBITDA in 2026.

Pressured by the fall in the share price, which has dropped 45% since the presentation of the previous plan in 2019, Telefónica must convince investors that its roadmap can increase the price and improve profitability. To achieve this, it plans to promote the B2C (company to end customer) and B2B (between companies) segments, increase income derived from the relationship with its partners, improve efficiency and maintain the profile with “a lower investment.”

The previous 2019-2022 strategic plan focused on Spain, Brazil, the United Kingdom and Germany as key markets, the creation of the Tech and Infra units and the separation (spin-off) from Latin America (except Brazil) to give it an exit through total or partial sale. The debt reduction objective has been met thanks to the sale of assets such as the Telxius towers or the Central American subsidiaries, going from 37,800 million euros when the plan was approved at the end of 2019 to 26,537 million at the end of September past. The United Kingdom markets have also been consolidated, with the merger of O2 with Virgin Media; in Brazil, with the acquisition of Oi’s mobile assets; and in Germany, with the alliance established with Deutsche Telekom and Vodafone for network sharing and the purchase of Be-Terna.

But the attempts to make money with the former Latin American subsidiaries (Mexico, Colombia, Venezuela, Ecuador, Uruguay, Chile, Argentina and Peru), either through a sale or by going public, have not been successful. Nor have investors been able to enter Tech as intended. However, the worst has come in the failed objective of creating value for the shareholder. On November 27, 2019, the date of presentation of the previous plan, the price was 6.78 euros per share. When the new plan was announced in June, the stock closed at 3.81 euros. This Wednesday it closed at 3.69 euros, 0.43% less than Tuesday and 45% less than in 2019.

One of the pillars of the new plan will be the incentivized sick leave plan that Telefónica intends to affect a maximum of 5,000 workers, approximately a third of the Spanish subsidiary’s workforce. This is the fourth voluntary withdrawal plan applied by the operator in the last decade. Asked about the details of this adjustment, the CEO, Ángel Vilá, indicated that they still have to negotiate with the union representatives and that the objective is to adapt the workforce to new needs, with more technological profiles. “There are new ways of working and attracting talent,” he said.

The operator also published this Wednesday the results for the third quarter, with a growth in net profit of 9.3% compared to the same period last year, up to 502 million euros. While the turnover has stagnated at 10,321 million, 0.2% less, due to the drop in income in Argentina. The operator continues the path of debt reduction, which stands at 26,537 million, 942 million less, and has confirmed its forecasts for the year as a whole, which were already revised upwards in July.

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