Your browser is not supported. Please update it.

4 December 2019

Telefónica sets out five-point transformation plan, poised to exit LATAM

Telefónica has announced a major restructuring, which appears to set the stage to withdraw from the Latin American markets that were supposed to deliver growth and so mitigate the effects of slowdown and saturation in Europe.

The debt-laden Spanish telecoms group has set out a five-point plan that is more geographically selective than its current structure, but places new levels of emphasis on generating growth from enterprise-focused services, while joining the popular European trend to offload and monetize infrastructure assets such as cell towers.

Chairman and CEO José María Álvarez-Pallete announced the plan, saying it would stimulate growth, improve efficiency and “design a company for the next 100 years”.

Geographically, Telefónica plans to focus mainly on its three remaining European markets – Spain, the UK and Germany – plus Brazil, which Álvarez-Pallete says are the largest markets with the greatest growth potential, “where our scale and leadership allow us to be more ambitious”.

In 2018, these four markets did account for more than 82% of  Telefónica Group’s operating income, and almost 76% of revenue. However, securing significant growth from the European markets has been challenging in recent years, so the details Telefónica puts behind its goal of expanding enterprise and IoT business will be critical to deciding how credible the new structure is as a growth engine – or whether it is really just a telco battening down the hatches and aiming to harness market scale to stay above water in familiar geographies.

Brazil was once a white hope for telco growth, but – like the other BRIC (Brazil, Russia, India and China) countries – it has suffered economic downturn and geopolitical upheaval in recent years. However, it remains a huge economy with considerable untapped potential in mobile communications, content, cloud services and multiplay, though Telefónica is unlikely to be able to seize a large share of this new business without considerable further investment in network expansion, spectrum and ecosystem development.

Other countries in the operator’s Hispanoamérica group will be placed into an autonomous unit, and placed under review, which was widely taken to be a first step towards exiting these markets. Telefónica already sold some central American operations to América Movil and Millicom earlier this year – Millicom paid $1.65bn for units in Panama, Costa Rica and Nicaragua; while América Movil bought the Guatemala subsidiary for $333m and the El Salvador unit for $315m.

That leaves Telefónica’s Movistar mobile brand active in Argentina , Chile , Colombia , Ecuador , Mexico , Peru , Venezuela and Uruguay. In 2018, before the divestments early this year, Telefónica’s Latin American customer base (excluding Brazil) was stable at just over 130m, but revenue was down 14.8% year-on-year, while operating income was down by 29%.

Álvarez-Pallete said spin-off and review of Hispanoamérica would meet “the dual objective of modulating our exposure to the region, while creating the conditions to maximize its value, both via growth, consolidation and potential corporate operations”.

In the short term, the operator is chasing cost efficiencies on an unprecedented scale, by reducing the number of operating countries and by embarking on a new round of layoffs and reorganizations, especially at head office. “If we want to be simple, transparent and agile with customers, we must simplify ourselves first,” Álvarez-Pallete said.

It is making familiar noises about becoming lean and agile, to reduce cost and debt, and to respond more quickly to new commercial opportunities. But we have heard this before from Telefónica, and it has remained debt-ridden and cumbersome, while past initiatives that appeared to be digital-focused and innovative, such as the creation of UK-based Telefónica Digital in 2011, have often been the victim of U-turns or inadequate implementation.

Of course, one area where the telco has been outstandingly innovative is its migration to a fully cloud-native infrastructure, Unica, which will support all its future fixed and mobile networks and platforms. But while this has been a genuinely ambitious and ground-breaking program, there is a real risk that, by the time Unica is commercially ready, it will look expensive and hefty compared to more modern, containerized architectures, which will often run in the public or hybrid cloud, rather than requiring a full build-out of telco cloud infrastructure.

For now, the latest iteration of Telefónica’s attempt to become a full digital, cloud-based service provider will be housed in one of two new internal organizations, Telefónica Tech. This will focus on harnessing modern IT and connectivity platforms to tap into the potential for new revenues from business-to-business and IoT services. The unit will bring together the operator’s activities in cybersecurity, big data, cloud platforms, IoT and enterprise 5G, in a coordinated platform and go-to-market structure.

This is designed to “leverage the muscle and local reach of the commercial teams in each country to sell its services and aspires to export the value proposition to other countries in which we are not present, through alliances,” said the company, which is eyeing the global scale/local ecosystem approach of the webscalers.

The operator says these businesses are currently enjoying better than 30% annual revenue growth and this should add up to more than €2bn ($2.2bn) in additional revenues by 2022. This looks bold but not impossible – in the telco’s most recent quarter, Q3, it made €439m ($483m) from “advanced digital services,” a 32% increase on the year-earlier figure. Its cloud business is outperforming the market in every country, it claims.

The business will be headed by José Cerdán, currently global head of the operator’s B2B unit, reporting to COO Angel Vilá.

The other new division is Telefónica Infrastructure, which sees the company following rivals like Vodafone, Telecom Italia and Orange into moving its towers, and other physical assets, into an arm’s-length subsidiary that will enable it to unlock value more easily. The company already has a majority stake in a towers business called Telxius, which runs about 18,000 sites in six markets in Europe and Latin America. But the new approach will go a lot further in seeking to unlock the value in physical assets like sites and submarine cables.

Vodafone has argued strongly that mobile infrastructure is very undervalued and that it would expect an enterprise value, for its European assets, of at least 20 times EBITDA – even allowing for some valuation drops if a large number of towers suddenly comes to market. In September, Telefónica said it was considering “monetization” options for about 50,000 towers which are currently outside Telxius but are owned by other opcos – including 19,000 in Germany; plus about 7,000 that are part of Telefónica’s 50:50 UK joint venture with Vodafone, Cornerstone.

These additional towers, and other infrastructure assets, will now be placed, along with the 50.01% stake in Telxius, in Telefónica Infra, whose ambition, according to Álvarez-Pallete, is “to be one of the largest telecommunications infrastructure units in the world, ready to channel the traffic explosion, and it will allow us to exploit the value of a unique portfolio of assets and attract potential partners.”

The new unit will be larger than Europe’s biggest independent towerco, Cellnex, which has 45,000 towers and 2018 revenues of €901m. Telefónica controls, either directly or indirectly, 68,000 towers. Its new Infra company will also include DAS (distributed antenna systems), greenfield fiber deployments and data centers, including edge clouds.

Telefónica Infra will be headed up by Guillermo Ansaldo, most recently head of the operator’s Global Resources unit, also reporting to Vilá.

Some changes have been made to the executive team that will have to see through the new strategy. Enrique Blanco, the influential CTIO, joins the top level team, reporting to Vilá, and heading up the Technology and Architecture unit. This will be responsible for defining “strategic technological guidelines” to underpin the new approaches and structure.

Vilá’s responsibilities have been extended and he appears to be the cornerstone of the whole new structure, overseeing the two new units and also having overall responsibility for the four main country businesses; and for the Digital Consumer unit (headed by Chema Alonso, currently chief data officer); and Business Solutions, which will be headed up by Telefónica Tech’s José Cerdán.

Leaving the top table are chief commercial digital officer Mariano de Beer and the head of Hispam Sur B,ernardo Quinn.

It is supposed to come from a new unit called Telefónica Tech, which will bring together existing digital businesses and focus on three areas: Cybersecurity; IoT (the Internet of Things) and big data; and the cloud. These businesses are currently on a roll at the Spanish operator. For the recent third quarter, it made €439m ($483m) from what it calls “advanced digital services,” a 32% increase on the year-earlier figure. Its cloud business is outperforming the market in every country, it boasts. IoT and security are booming areas.