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Why Telefónica has become a prime acquisition target

A report (Spanish) that American telecom giant AT&T had been considering the purchase of Spanish carrier Telefónica sent shares of the latter as much as 3% higher today. And even though the news was that the Spanish government had rejected the acquisition—and Telefonica quickly denied the existence of any discussions—the report has raised speculation that non-European firms could take a closer interest in buying up some of the region’s corporate giants at a discount.

Telefónica has footed the bill for expansion in South America by issuing debt. Strategically, such investments may have been a smart move. The company’s Latin American segment has been much stronger than its European one. Whereas cell phone penetration is still increasing sharply in Central and South America, Europe is flattening out. Indeed, Spanish consumers have begun treating data like a luxury good, forgoing expensive plans in times of crisis.

But Telefónica’s major problem is that it happens to be a Spanish company. Raising funds to rollover debt–much of which is short-term debt, and thus subject to market swings–wouldn’t be a big deal if the company were headquartered in a country not plagued by a debt crisis. The rate at which even the best-positioned Spanish companies can borrow is generally linked to the Spanish government’s borrowing costs. Though at a modest 4.6% right now, last year Spanish government debt yielded as much as 7.7% for 10 years.

With government debt yielding much less, healthy US or German companies can pay much less to borrow. That would make Telefónica’s €52 billion ($69 billion) debt burden less problematic. Would-be acquirers would have much to gain from the company’s already substantial investments in the Americas, and might be more willing to sell off unprofitable European assets.

Telefónica is hardly the first European telecom to attract foreign attention. For example, Carlos Slim Helú, CEO and Chairman of América Móvil, has recently picked up large stakes in Austria Telekom and Dutch cell phone carrier KPN.

But rumors about Telefónica speak to more than just a single industry. Foreign investors, particularly those from the US and China, have been sitting on the sidelines waiting for economic conditions to worsen and reforms to be enacted in Greece, Spain, Italy, and Portugal. Today’s rumors spark hopes that the time might finally be right for foreign companies and investors to return to the market in a big way. Still, this deal doesn’t seem to be going anywhere, so it’s probably too early to call a turnaround.

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