Morningstar | TEF Updated Forecasts and Estimates from 05 Mar 2019
Telefonica is the incumbent telephone operator in Spain and, along with America Movil, one of two dominant operators in Latin America. Thanks to its acquisition of E-Plus in Germany, it is the largest wireless operator by number of subscribers in the country. It is also the second-largest wireless operator in the U.K. Beyond its size, which provides Telefonica with scale by spreading its fixed costs over a large number of subscribers, we like the company's move into converged services, bundling fixed-line services with broadband, pay TV, and wireless telephony. The company has been the leader in this movement, which positions it well to benefit from this momentum-growing trend. We believe Spain is the country that is furthest along in this transition, driven by Telefonica. The firm has also led the way in laying fibre in order to increase broadband speeds. Its fibre network in Spain now passes over 21 million premises, which is significantly higher than its competitors, Vodafone and Orange, in the country. We believe Telefonica's positioning in Spain sets it up for continued long-term growth.Beyond Spain, we believe the acquisitions of E-Plus in Germany and GVT in Brazil strengthen Telefonica's operations in those countries. In Germany, Telefonica is now the largest wireless operator by number of subscribers and in Brazil, it has the ability to transport its converged strategy from Spain throughout the whole country. Both acquisitions also provide significant cost-cutting opportunities.While we would have liked to have seen the company sell its U.K. operation in order to exit the more competitive U.K. market and reduce debt, this is still a good business. BT, Telefonica’s rival in this market, has moved slower to convergence than we'd expected after the acquisition of EE, which provides more chances for O2 (Telefonica unit). We also believe the company has other options to reduce its debt. It has agreed to sell its operations in Central America and could exit other countries as well. In the rest of Latin America, outside of Mexico where America Movil dominates, Telefonica continues to perform strongly. It is well positioned, and we don't see this changing.
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