Telefonica SA (TEF, Financial)(2.9%) (TEF – $12.10 – NYSE/TEF SM – €10.75 – Madrid Stock Exchange) has telecommunications businesses across Europe and Latin America, which constitute 51% of group revenue. Management has placed a strong emphasis on driving a return to revenue growth in the domestic Spanish market in order to stabilize margins and return to EBITDA growth. There is mounting evidence that the market dynamics are finally improving, partially attributable to better macro conditions and also to reduced competitive intensity following the acquisition of Jazztel by Orange (0.2%). Telefonica’s position in quad play has been strengthened by the acquisition of digital TV provider DTS which provides 150 channels of pay TV (including exclusive premium content) to 2 million Spanish homes via satellite. Elsewhere in Europe, Telefonica hopes to complete the restructuring of its portfolio with the pending sale of the O2 business in the UK to Hutchison 3. This will effectively leave the company with the two European core markets of Germany and Spain. The picture in Latin America is mixed. Clearly the weak economic trends in Brazil coupled with the sharp currency devaluation will continue to act as a drag on reported performance. Telefonica Brazil (0.2%) nonetheless remains the market leader with this position further reinforced by the acquisition of Global Village Telecom (GVT) earlier this year, providing a formidable fixed line presence and pathway to converged services. Telefonica has made significant strides in Mexico with revenue now growing at a high single-digit rate and margins improving. Following the sharp correction in the Telefonica share price since early August, the stock now trades at a discount P/E valuation to its peers of 10.5x.
From GAMCO's Global Telecommunications Fund third quarter 2015 shareholder commentary.
