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Telefónica’s Tech Unit Sale: Strategic Move or Debt Reduction?

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In a surprising move, Telefónica, the Spanish telecommunications giant, has contacted multiple banks to gauge the potential monetary gains of selling its Tech unit. This move has stirred speculation about the future of this division. According to insiders, Telefónica approached Banco Santander, which estimated the value of Tech at approximately €3.1 billion to €3.5 billion.

Additionally, two other financial establishments, La Caixa and BBVA, were also consulted. These, however, evaluated the Tech unit more modestly at €2.7 billion. It has been suggested that Telefónica’s intention to maintain majority control of Tech could mean that prospective investors might be hesitant to pay top dollar for a minority stake.

Despite the lower valuation, it is still significantly higher than the €2 billion that was quoted when parallel discussions began last October. Interestingly, one financial institution is noticeably missing from the lineup. According to earlier reports, Morgan Stanley was appointed by Telefónica in January to assist in promoting Tech to possible investors. The relationship between the telecom company and the bank reportedly deteriorated when it was revealed that the bank was advising Saudi Telecom Company (STC), which owns a 9.9 percent stake in Telefónica.

Investors interested in profiting from the growing demand for cybersecurity, IoT, and big data solutions might see potential in acquiring a stake in Telefónica Tech. This fast-expanding division reported revenue of €1.33 billion in the first three-quarters of this year, an impressive 30% increase compared to 2022. According to Telefónica, this represents 85% of its earnings generated in markets with robust currencies and an annual bookings increase of 26%.

During Telefónica’s recent strategic review – GPS – the firm confirmed that Tech would continue to play a critical part in its plan of amassing €5 billion in free cash flow by the end of 2026. The objective is for Telefónica Tech to contribute €3 billion to this effort, reflecting a compound annual growth rate (CAGR) of 18%.

In light of its strategic value, impressive financial performance, and a portfolio that covers several key areas within the enterprise technology sector, the question arises as to why Telefónica would consider reducing its investment in Tech. One plausible motive could be to lower net debt, which, as of Q3, stands at a significant €26.5 billion. However, the telecom provider seems to manage this burden adequately, as evidence by a €2.1 billion debt reduction compared to last year.

Equally, some argue that even though Tech doesn’t bring in income, it appears to be performing quite well. Telefónica has withheld Tech’s profits, but insider sources estimate revenues of €1.8 billion this year and an EBITDA of €270 million.

Therefore, the underlying reason behind Telefónica’s inclination to sell might be as straightforward as the company’s primary business areas – network access and associated communication and data services – not benefiting heavily from Tech’s operations. Consequently, a logical step might be to profit from the sale, applaud the success, and reinvest the returns in its core operations.

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