Uncertainty looms over Telefónica Tech following €3.5 billion valuation

Unnamed sources cited by El Confidencial said the Spanish incumbent hired Banco Santander, which calculated that Tech could be worth between €3.1 billion and €3.5 billion.

Two other banks allegedly tapped up by Telefónica – La Caixa and BBVA – were a little more conservative, valuing it at €2.7 billion. According to the sources, their reasoning is that Telefónica is looking to retain majority control of Tech, meaning potential investors are less willing to pay a premium to be a minority holder.

Even that lower valuation is still more than the €2 billion that was floating around when similar rumours emerged back in October.

Incidentally, one bank is conspicuously absent from the list. Morgan Stanley was hired by Telefónica back in January – according to reports at the time – to help it pitch Tech to potential investors.

However, according to the El Confidencial report, Telefónica's relationship with Morgan Stanley allegedly soured when it emerged that the bank was serving as an adviser to Saudi Telecom Company (STC) as it built up a 9.9 percent stake in Telefónica.

Any investors looking to capitalise on demand for cybersecurity, IoT and big data solutions could arguably do worse than taking a stake in Telefónica Tech.

The fast-growing division turned over €1.33 billion in the first nine months of the year, up 30% on 2022. Telefónica said 85% of its revenue is generated in markets with strong currencies. Bookings were up 26% year-on-year.

When Telefónica presented its updated strategic plan – GPS – earlier this month, it said Tech will continue to play an important role in achieving its objective of generating €5 billion of free cash flow by the end of 2026. It has set a target for Telefónica Tech to generate €3 billion of revenue by then, which equates to a compound annual growth rate (CAGR) of 18%.

With a role in the group's strategic plan, a strong order book, impressive revenue growth, and a portfolio of solutions that address some of the most in-demand areas of the enterprise tech sector, it begs the question, why would Telefónica wish to reduce the size of its holding?

Paying down net debt would be one reason. At the end of Q3 it stood at a hefty €26.5 billion; however that's a €2.1 billion improvement on last year, so Telefónica appears to be handling it.

Another reason would be Tech doesn't generate any income, but it seems to be doing OK.

Telefónica doesn't share Tech's earnings, but according to El Confidencial's sources, the banks estimate that Tech will turn over €1.8 billion this year, with an EBITDA of €270 million.

In actuality then, the reason Telefónica might be inclined to sell is simply because its main lines of business – selling network access and related comms and data services – don't derive enough benefit from Tech's activities.

As such, the logical thing to do might be to cash in, pat itself on the back for a job well done, and spend that money on its core operations.