Telefonica buys back submarine cable stake

Telefonica is spending a couple of hundred million euros to buy back a stake in its submarine cable business that it sold to KKR almost exactly five years ago.

Specifically, the Spanish incumbent and partner Pontegadea have agreed to pay €215.7 million, subject to various adjustments, for a 40% stake in infrastructure group Telxius Telecom, owner of a sizeable submarine cables network. It’s pretty much a 50:50 deal; Telefonica will raise its stake in the unit to 70% from 50.01%, while investment company Pontegadea will take the remaining 30%, having previously held a 9.99% stake.

The companies gave no indication as to when they expect the transaction to close, noting only that it requires regulatory and competition approvals.

At this stage, the deal raises more questions than it answers, given that we’re talking about a big telco that has been offloading assets over the past year or so as part of a major debt-reduction push now buying back some of those same assets.

Private equity firm KKR agreed to pay €1.275 billion for a 40% stake in Telxius Telecom in early 2017, a deal that represented an early asset monetisation move for Telefonica. At the time, the business included 16,000 telecoms towers, as well as tens of thousands of kilometres of fibre-optic subsea cable. However, the owners hived off the towers – by then numbering 31,000 – to American Tower in a €7.7 billion deal that closed last summer, a transaction that helped Telefonica reach its much-vaunted €9 billion debt-reduction goal. That, and the merger of its O2 business in the UK with Virgin Media, amongst other things.

Given that the asset has changed so much since KKR bought in, it’s difficult to comment on the valuation of the subsea cables unit based on this latest deal. It’s less difficult to see that KKR clearly made a decent return on the towers segment.

It could well be that simple for the PE firm; it has made its money and wants out. But it’s worth noting that KKR is keen to buy TIM in Italy – although admittedly that deal is not looking particularly likely to come to fruition at present – which owns subsea cable business Sparkle. It might be too much of a stretch to suggest that KKR is looking to avoid a competition body conflict by selling its Spanish-owned cables now, but that might have factored into its thinking.

For its part, Telefonica is not giving much away. Naturally, it is pitching the deal as having been driven by the potential of the submarine cable space, but it’s questionable whether that’s it’s true motivation.

“The deal represents a clear commitment to submarine cables, which are assets with high growth potential and industrial relevance in the new digital era,” Telefonica said, in a statement, in which it also highlighted the importance of the sector during the Covid-19 pandemic.

That’s certainly not an incorrect assumption, but Telefonica has a history of offloading assets with strong growth potential in a bid to make some money in the here and now. Indeed, while some of its major European rivals have held on to tower assets, or major stakes therein, in order to capitalise on that potential, Telefonica sold out of its towers business completely. So either it is rethinking this strategy, or something else is going on.

There were rumours last summer that Telefonica was in talks with Swedish investor EQT regarding the sale of its submarine cables business, but no deal was ever announced. It could be that those talks – or others in a similar vein – will be reignited following the stake buyback from KKR.