Madrid: Telefonica SA, Spain’s biggest phone operator, is considering ways to sell shares in its entire Latin America business to raise money and cut debt, people familiar with the matter said.

One option is to create a regional holding excluding Telefonica Brasil SA and list it in the US, the people said, asking not to be named as the plans aren’t public. Telefonica, with 57 billion euros (Dh257 billion) in net financial debt, could also incorporate all Latin America businesses into the Brazil unit and hold a secondary share sale, they said, adding that no decision has been made. All assets in the region combined should be worth at least 40 billion euros, one of the people said.

After spending $85 billion (Dh312.12 billion) on acquisitions since taking over in 2000, Chief Executive Officer Cesar Alierta is turning to some of the most valuable divisions to raise cash.

Last month, Telefonica decided to sell half of its stake in China Unicom (Hong Kong) Ltd, paring its seven-year venture into one of the fastest-growing wireless markets. In May, Telefonica announced a plan to sell shares in its German and Latin American phone units.

“Debt overhang currently drives the company’s strategy and management’s reaction to market pressure has been to monetise its best assets,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at London based FM Capital Partners Ltd. “There would be appetite for a spin-off as Latin America will see some robust growth, but how willing is Alierta to abandon his most promising footprint?”

Rating cuts

A Latin America share sale may not happen until 2013 because of regulatory issues, two of the people said, adding that Madrid-based Telefonica will focus first on the IPO of its German wireless unit.

The operator is considering a sale of a 20 per cent stake in the O2 Germany business to raise as much as 2 billion euros, people familiar with the matter have said. A Telefonica official declined to comment.

Telefonica rose as much as 1.9 per cent to 10.03 euros in Madrid today and was up 1.2 percent as of 4.15pm. The stock has fallen 26 per cent this year, making it the worst performer in the 19-company Bloomberg Europe Telecommunication Services Index.

On June 20, Moody’s Investors Service lowered Telefonica’s long-term debt rating one level to Baa2, the second-lowest investment grade, and said it may be reduced further as Spanish consumers scale back spending and the government’s credit profile worsens. Standard & Poor’s in May cut Telefonica’s rating to BBB, the equivalent of the Moody’s grade.

Listing options

Brazil, Telefonica’s biggest market in Latin America, accounted for more than 23 per cent of the group’s revenue in the first quarter. Other markets where it operates in the region include Argentina, Chile, Peru, Mexico, Venezuela and Colombia.

Sanford C. Bernstein analysts Robin Bienenstock and John Keith have estimated that the Latin American business, excluding the “unattractive” Argentina and Venezuela units, is worth 47 billion euros.

Listing the regional holding in the US may be the most attractive option because Telefonica Brasil is trading at a low valuation, making a secondary share sale in the South American country less appealing, said two of the people. On the other hand side, a share sale in Brazil would be easier to carry out, they said.

Choppy market’s conditions might challenge the plans. At least 50 companies shelved their IPOs in the quarter ending on June 30 as Europe’s debt crisis spread, growth prospects slowed in China and Facebook Inc’s stock sank as much as 32 per cent after its IPO. Companies raised $8.1 billion in Latin American share offerings this year, about half of last year’s amount, according to data compiled by Bloomberg.

Refinancing risk

UBS analysts Nick Lyall, Maria Tereza Azevedo and Dan Kwiatkowski wrote in a July 5 note that other options for the Latin American business include separate country listings and Telefonica selling down it stake in the Brazil business.

Alierta bought Brazil’s mobile-phone company Vivo Participacoes SA in 2010 for 7.5 billion euros.

“A sale of a large minority stake would certainly allow the group to tackle its refinancing risk for the coming years, regardless of the development on the Spanish sovereign front,” FM Capital Partners’ Alexaline said.

The operator has said it wants to reach a net debt ratio of less than 2.35 times operating income before depreciation and amortisation this year. The ratio was about 2.5 times last year.