Morningstar | Telefonica Should Benefit From a Solid Network in Spain and Economic Growth in Latin America
Telefonica has faced upheaval in Spain (about a quarter of total revenue) over the past decade, where economic turmoil and fierce competition have cut the firm’s revenue by 40%. It remains the dominant telecom carrier in the country, however, at more than twice the size of its closest rivals, Orange and Vodafone. In Latin America (more than 40% of revenue), Telefonica is, along with America Movil, one of two dominant operators. The remainder of the business resides in Germany and the U.K., where it holds solid market share, but its position isn’t as strong. We don’t expect Telefonica will produce much growth in the coming years, but it should generate solid cash flow, enabling debt reduction and a steady dividend. Telefonica has been a leader in delivering converged offerings, bundling fixed-line Internet access, pay TV, and wireless services. The firm has led the way in laying fiber in order to increase broadband speeds, passing around 22 million customer locations, nearly the entire country. Telefonica holds about 40% share of the Internet access market directly and roughly another 10% through wholesale partners, including Vodafone. Telefonica is also the largest wireless carrier in Spain, with about 30% market share, a position that should strengthen further as it increasingly ties fixed-line and wireless services together.Elsewhere in Europe, Telefonica is primarily a wireless carrier, leaving it at a relative disadvantage. The firm consolidated the German market with the acquisition of E-Plus, but growth in margins have remained anemic. Telefonica also attempted to exit the U.K., but so far has been unsuccessful.In Latin America, Telefonica’s 74%-owned Brazilian subsidiary holds a dominant position in the wireless business, with more than 40% share of postpaid market. The firm holds a sizable position in the fixed-line business as well. Beyond Brazil, Telefonica holds solid positions in Argentina, Chile, and Peru, but it has struggled elsewhere. The decision to sell off operations in Central America should improve the firm’s focus in the region. Economic and political struggles remain the biggest issue facing Telefonica in Latin America, though.