Telefónica Reiterates Guidance After Venezuelan Devaluation

Telefónica has reiterated its short- and mid-term guidances, as well as the dividend targets until 2012, in response to the recent devaluation of the Venezuelan bolivar and the resultant speculation that this would cause the company miss earnings targets in 2010.

Outlook and Implications

• Large Exposure to Venezuela: Movistar Venezuela currently offers fixed telephony, broadband, pay-TV, and mobile phone services in the country. The operator is ranked second in the local mobile phone market, with a 39.6% market share behind the mobile arm of Venezuelan state-owned incumbent CANTV, Movilnet, with a 39.9% market share. Digitel, owned by Telvenco SA and controlled by Venezuelan businessman Osvaldo Cisneros, is ranked third with a 20.5% share. During the first nine months of the year, Movistar Venezuela posted revenues of 2,611 million euro, 39.5% more than in the previous year—6.4% of the total revenues generated in Latin America. Operating income before depreciation and amortisation (OIBDA) stood at 1,332 million euro, 53.7% more y/y. The devaluation of the Bolivar is not the first problem Telefónica faces in Venezuela. In 2003, the government introduced strict controls for the repatriation of funds forcing companies to exchange funds at a Bolivar-to-U.S. dollar, a rate less favourable than the official exchange. Since then, Telefónica has been unsuccessfully negotiating the repatriation of its US$2 million in profits at the official rate. Moreover, the government's heavy involvement in the economy is likely to make it rather difficult for Telefónica to pass on the impact of the devalued currency to its local retail prices.
• Latin America's Long-Term Dynamics Favour Telefónica: The political hazards related to Telefónica's Venezuelan investments are hardly anything new, and although there is a realistic chance that similar risks may to a certain extent realise in other Latin American markets (for instance Argentina) we do not see this as a reason to doubt the longer-term feasibility of the group's growth strategy. For a retail-driven industry such as telecoms, the prospects for future growth are always closely related to certain dynamics in demography, and in Latin America these remain as favourable as they have always been when Telefónica's has decided on its investments. Firstly, the region's relatively high fertility rates imply that Telefónica currently does not have the same downside risk as operators which are more exposed to countries where the size of the addressable market is set to either stagnate or decline. Secondly, the median ages in all Latin American markets are rather low, which in telecoms is of particular significance as the greatest uptake of value-added services tends to take place among younger users. And, thirdly, the urbanisation rates in both Central America and especially South America are notably high in comparison to most other emerging markets, which in Telefónica's case is most of all a boost for its broadband roll-outs, as it can make the deployed infrastructure cover more households for less investment.