Telefonica Restructures Operations - Analyst Blog
07 September 2011 - 7:45PM
Zacks
Spanish telecom giant Telefonica SA (TEF) is
restructuring its operations for an efficient online business. The
company will construct a new business unit, Telefonica Digital,
which will be headquartered in London.
The new business unit will include Spain’s popular social
networking site Tuenti, Internet telephony provider Jajah, Internet
portal Terra and other businesses. With the new division,
Telefonica will streamline its operations in two regions –– Europe
and Latin America. Spanish operations will be
included in Europe.
Telefonica’s Spanish operations are suffering from the lingering economic
downturn at home and intense competition. In the first half
of the year, Telefonica generated lackluster revenue in its Spanish
division.
Customers are switching to cheaper offers from smaller
rivals, leading to lower revenues and earnings for the company.
In addition, the company’s Spanish revenue continues to be
affected by the ongoing reduction in mobile termination rates,
which is the fee that operators charge each other to connect
calls.To improve its domestic profitability, Telefonica recently
planned to lay off 6,500 employees over a three-year (2011–2013)
period.
Telefonica Europe is gaining market share from increasing
smartphone penetration and data growth. The company continues to
prepare the ground work for future growth by improving network
capability to support mobile data services. Latin America remains
one of the best performing regions for Telefonica, particularly
Brazil and Mexico.
Brazil is expected to become the major source of revenue
following the integration of the fixed and mobile businesses. The
consolidation of two Brazilian units Vivo Participacoes and
Telecomunicacoes de Sao Paulo SA (VIV) would
generate synergies of €3.7–4.6 billion, up from the previous
expectation of €3.3–4.2 billion. With respect to Mexico, Telefonica
is gaining market share and improving its mobile broadband growth
on the back of spectrum wins in 2010.
The move is similar to other telecom carriers in the industry
that are struggling to offset the continued erosion in fixed line
business in
favor of high-speed data mobile services. We believe the
restructuring will benefit Telefonica by taking full
advantage of digital world opportunities.
The restructuring will also result in the creation of a Global
Resources unit that will strengthen the profitability of the
business by leveraging and benefiting from economies of scale.
We are maintaining our long-term Neutral recommendation on
Telefonica. For the short term (1–3 months), the stock retains a
Hold rating with a Zacks #3 Rank.
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