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Telefonica surprises with signs of Spanish turnaround

Workers rest sitting next to Telefonica's tower entrance in Barcelona January 30, 2013. REUTERS/Albert Gea
Workers rest sitting next to Telefonica's tower entrance in Barcelona January 30, 2013. REUTERS/Albert Gea

By Clare Kane and Harro Ten Wolde

MADRID/BARCELONA (Reuters) - Spain's Telefonica , Europe's biggest telecoms provider, showed signs of a turnaround on Thursday in its battered home market after a painful restructuring and shelved plans to float Latin American assets as a result of successful debt reduction.

The carrier, which has been battling recession for over a year in its domestic market, boosted its Spanish operating cash flow for the first time in four years as it successfully targeted customers with value-for-money deals.

In contrast to Deutsche Telekom , the euro zone's second-biggest telecoms company - which disappointed investors with the scale of its investments to hang on to customers in its home market Germany - Telefonica has gone down a different path.

Instead of spending furiously on subsidizing smartphones to keep its more affluent customers tied into multi-year contracts, Telefonica stopped smartphone subsidies last year and saved 500 million euros as a result, according to Telefonica Europe Chief Executive Eva Castillo.

A new offering packaging fixed-line, mobile, broadband and TV services has attracted 1.5 million customers since its launch in October and is "a clear commercial success", Telefonica said.

Many rivals in Europe's crowded and mature mobile markets are adopting a more defensive approach, hoping to squeeze more money out of the data services that smartphone users increasingly favor over their former cash cow, voice calls.

Deutsche Telekom, whose German domestic market is the euro zone's strongest major economy, is stepping up investments to shore up its customer base in Germany, which accounts for 39 percent of its revenues.

The company posted a drop in fourth-quarter core profit that missed analysts' expectations, although it said it still expected an increase in core profit this year.

"We are going on the offensive - with extensive investments in networks and in the market," outgoing Chief Executive Rene Obermann said in a statement.

Telekom Austria , which reported better-than-feared results, has also said it will need to make substantial investments to defend its market share at home, despite a consolidation of the Austrian market to three in January.

IRISH WRITEDOWN

Europe remains a tough market, with three or four telecoms operators in most countries, a prolonged economic crisis and active pro-consumer regulation that has been forcing carriers to cut prices and fees.

Telefonica's Latin American sales overtook its European sales for the first time last quarter, while the only two of Deutsche Telekom's European markets to grow, excluding its British joint venture, were Poland and Hungary.

Telefonica reported lower-than-expected net profit due to a surprise writedown of 527 million euros ($691 million) on its Irish unit, earning 3.9 billion euros in 2012 instead of the expected 4.4 billion euros.

Its overall operating income before depreciation and amortization (OIBDA) grew 5 percent to 21.2 billion euros and sales slipped 1 percent to 62.4 billion in 2012, broadly in line with estimates.

The company reiterated it would pay a dividend of 0.75 euros per share for 2013 after scrapping it last year for the first time since the Spanish Civil War as part of a cash-raising drive as it grapples with net debt of 51.3 billion euros.

Telefonica forecast revenue growth and lower operating margin erosion for 2013 and said it had scrapped plans to float its Latin American businesses, something it had previously considered as a way to raise up to 6 billion euros.

"There is not going to be an IPO of Latin America...This is not a priority anymore," Chief Executive Cesar Alierta said, adding that the company had achieved sufficient "financial flexibility" through asset sales in 2012.

Telefonica narrowly missed its net debt to operating income target ratio of 2.35 for 2012 - although not by enough to endanger its prized investment-grade rating - and said it targeted debt of under 47 billion euros in 2013.

But investors focused on the faster-than-expected Spanish turnaround, sending Telefonica shares up 2 percent to 10 euros by market close, against a flat European telecoms sector <.SXKP>.

"Spain comes as the big surprise, reinforces the credibility of Telefonica's domestic strategy and suggests stabilization could be closer than expected," BBVA analysts wrote in a note.

In neighboring Portugal, also hit hard by the euro zone crisis, Portugal Telecom's fourth-quarter sales fell 7 percent amid a deepening recession. It posted a 10 percent rise in profit, beating forecasts, thanks to disposals and cost cuts.

GERMAN INVESTMENTS

Investors were less convinced by the strategy of Deutsche Telekom, whose earnings before interest, tax, depreciation and amortization (EBITDA) excluding special items fell 13 percent to 4.03 billion euros ($5.28 billion), missing an average forecast of 4.19 billion in a Reuters poll.

The company said it still expected EBITDA to grow to around 18.4 billion euros this year, above the Reuters poll average estimate of 17.5 billion euros.

But the scale of investments in Germany - although they had been flagged - combined with weakness in the United States worried some investors, and Deutsche Telekom shares closed flat having dropped 2 percent earlier.

Jefferies analysts wrote: "Results now show this coming through... mainly in German mobile where market investments (opex) have been increased by 0.2 billion euros in 4Q alone. This remains the main reason for our caution on the stock."

Telekom Austria also reported a drop in core profits as its two biggest markets, Austria and Bulgaria, struggled with competition and regulation.

The company that is 26 percent owned by Carlos Slim and his America Movil group said competition remained fierce.

Still, quarterly core profit of 319 million euros and flat sales of 1.12 billion euros beat low expectations, sending its shares up 7 percent. Telekom Austria reiterated its forecast for 2013 sales to fall to about 4.1 billion euros from 4.4 billion. It continued to decline to provide a profit forecast.

Outside of the euro zone, Russian operator MegaFon showed its domestic market is approaching that of mature European ones. MegaFon said revenue growth would likely slow this year and it would focus on mobile data rather than voice services to drive future growth.

(Additional reporting and writing by Georgina Prodhan; Editing by Sophie Walker)

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