I found this to be very informative. The internet is ever changing and if you invest in BIDU – Baidu or Google, Apple you would need to know this.
Disclosure: Drizzt is vested in this stock.
With this deal, Telefonica paid a premium, but the value of this deal could be higher than the price paid for Vivo. The synergy of Vivo’s mobile communication with Telefonica’s fixed line business to structure a comprehensive product could increase the switch over and increase revenue.
Telefonica will initially pay 4.5 billion euros in the all- cash deal, 1 billion euros at the end of the year and the rest in 2011, the company said in a statement. Separately, Portugal Telecom agreed to pay 8.44 billion reais ($4.8 billion) for 22.4 percent stake in Brazil’s biggest phone operator Telemar Norte Leste, known as Oi.
Telefonica Chairman Cesar Alierta has raised the offer by 32 percent from his initial bid in May to gain control of Vivo. Alierta wants to merge Vivo with Telecomunicacoes de Sao Paulo SA, or Telesp, the Spanish company’s fixed-line unit in Brazil, to ride the growth in the Latin American country as business slows at home.
“Strategically, this was clearly necessary for Telefonica and the price reflects that,” said Alberto Espelosin, who helps manage about $12 billion at Ibercaja Gestion in Zaragoza, Spain, and owns Telefonica shares.
Both companies have sought growth in Brazil as markets at home cooled. Vivo had 30 percent of Brazil’s 179 million wireless subscriptions at the end of March, according to Anatel, the country’s phone regulator. Brazil’s economy is growing at the fastest pace in more than two decades.
Portugal Telecom shares were suspended and will resume trading at 1.30 p.m. in Lisbon. Telefonica rose as much as 1.1 percent to 17.07 euros in Madrid, giving the company a market value of 77.7 billion euros.
Bigger Than Whole
Telefonica’s latest offer for Portugal Telecom’s stake in Brasilcel NV, their 50-50 venture that owns 60 percent of Vivo, is greater than the Portuguese company’s market value of 7.44 billion euros.
Telefonica on May 6 offered 5.7 billion euros for the stake. It raised the bid to 6.5 billion euros in June and in the same month increased it to 7.15 billion euros, after the two earlier offers were rejected by the company.
The third offer, which won approval from the Lisbon-based company’s investors, was blocked by the Portuguese government last month using special veto powers.
Telefonica’s bid values Vivo at more than 10 times this year’s expected earnings before interest, tax, depreciation and amortization. Telefonica trades at 3.5 times estimated Ebitda.
The Portuguese government had defined Portugal Telecom’s stake in Vivo as “strategic” for the country.
Telefonica, whose Brazilian unit Telesp’s first-quarter sales fell 1.4 percent in local-currency terms, needs a greater mobile-phone presence in the country.
Portugal Telecom has relied on Brazil for growth, with sales from the Latin American country rising 27 percent in the first quarter, while revenue at home fell 3.6 percent. Since 2006, Vivo has overtaken the fixed-line unit as the company’s biggest revenue contributor, accounting for half of sales in the first quarter.
For Portugal Telecom, a deal with Brazil’s Oi would let it keep a presence in the country even as it sells its Vivo stake to Telefonica. Oi, based in Rio de Janeiro, provides Internet access, mobile, fixed-line and pay-television services.
Telefonica will partly fund the Vivo transaction with a 5 billion-euro loan arranged by Citigroup Inc., people with knowledge of the deal said July 8. The company offered to pay initial interest of 65 basis points, or 0.65 percentage point, on the three-year borrowing, the people said.
The cost of insuring against losses on Telefonica bonds rose 13 basis points to 172.5, according to data provider CMA. Credit de fault swaps pay the buyers the face value in exchange for the underlying security if a borrower fails to meet its obligations, less the value of the defaulted debt.
I initiated a position in Telefonica on Thursday at a price of USD 61.50.
Telefonica, together with its subsidiaries and investees operates in the telecommunications, media and contact center industries. Telefonica basic purpose is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services.
The Company operates in three business areas: Telefonica Spain, Telefonica Latin America and Telefonica Europe
Essentially Telefonica is the third largest telecommunications company in the world behind AT&T and Vodafone.
Withholding Taxes on dividends
The size of the position is not big.
My main intention is to see how the dividend payments gets affected by withholding taxes. Particularly, it may get quite complex for a Singaporean holding a Foreign ADR on the US Stock exchange.
The main question is will I get double taxed (First by a 20-25% withholding tax from Spain for a US ADR then secondly a 30% withholding tax from US as a alien to USA)
I am using DBS Vickers so dividend handling charges is nil.
The end result is that my dividend yield could be really small. The current div yield listed at USD 62 is 8%.
A 30% US withholding tax will bring the current yield to 5.6%. If there is another withholding tax from Spain it could be much lesser.
Telefonica as a dividend stock
Investigating Starhub, M1 Limited and Singtel makes me understand a lot about telecommunication companies going forward.
I gain a lot of insight into mobile communications and fixed line communications and the impact of 3G and LTE via Telco 2.0.
The coming wave changes the business economics of telcos particularly those heavy on mobile communications.
The end result is that in the developed markets, the telcos will find it difficult to increase their revenues or ARPU (average revenue per user) and that their cost on infrastructure will increase due to high data usage caused by all-you-can-eat unlimited data plans. [Read manifesto to find out more >]
The size of the company for me gives it a competitive advantage going forward. We saw how M1 Limited and Starhub struggled against the incumbent Singtel.
The incumbent is able to seriously spread the cost of marketing, capital expenditure, something the smaller telcos cannot do. They are able to undercut their competitors and eliminate switching cost better due to their larger capital base.
They are also able to partner popular handset manufacturers. Their sheer size enables them to have some buyer’s power over their suppliers.
Global subscriber base
Although their stock was affected badly as they generate earnings in Euros, less than 50% of their revenue comes from Spain.
Here is a table showing its subscriber base (both wired and wireless). Click to view larger image
Although due to its size its able to spread out cost, fighting a business battle on different fronts requires more capital expenditure in certain developing areas as well.
Right now, although I did say large size gives them power, their revenue is declining in Spain due to competition.
They are trying to make up for it via their biggest overseas revenue driver in Brazil.
Fundamentals [View Google Spread Sheet here >]
In terms of fundamentals Telefonica current trades at an EV/EBITDA of 9 times operating cashflow.
That is quite high compared to the rest of the european telcos but not the highest.
Fundamentally, it paid out 4.8 billion in dividends in 2009. Free Cashflow have been relatively maintained at 8.8 billion. This means that essentially it has the capability of paying out much more than 4.8 billion in dividends and still do not need to tap the debt market.
The management intends to hike the dividend payout further. Dividend payout have increase from 3.1 billion in 2006 to 4.8 billion in 2009.
If you checked my google spreadsheet you will realise that dividend payout have increase but free cashflow, operating cashflow and net income have not.
This likely means that dividend payout ratio have been increasing but not the earnings which have been stagnating. In my opinion this might not be a good sign.
Telefonica is in a downtrend. Prices are closer to the 52 week low rather than the 52 week high. Clear signs of it making lower highs and deeper lows.
Price broke a resistance form by the lower peaks but prices are still far away from the 200day moving average.
In terms of price factoring in fundamentals and technicals, it offers a good place to build a position.
I will only add more if the fundamentals and the price moves higher. I know we should buy things cheap but I am basing a lot on technicals here. A move up towards 65 only for it to fail and make a lower low towards 55 is a clear sign of Telefonica continuing its downtrend.
Telefonica after so much negativity have the potential to stage a turnaround and move up above the 200day moving average and stayed above.
If it doesn’t I am likely to sit around if it stays above 55. .