Telefónica’s 20-Year Gamble Pays Off

Published: February 26, 2012

BARCELONA — When Telefónica, the Spanish phone company, entered Latin America in 1992 by purchasing control of an operator in Chile, the company was criticized for exposing itself to a region prone to debt crises, political instability and corruption.

Twenty years later, the critics are nowhere to be found.

The operator, based in Madrid, has leveraged its deliberate, high-stakes expansion south of the U.S. border to become the largest network operator in the region. And financial results released last week showed that Telefónica had become the largest telecommunications company in Europe as well, as measured by global annual sales, passing Deutsche Telekom, the perennial leader.

“Telefónica has been a pioneer in this industry in terms of international diversification,” said Carlos Winzer, an analyst at Moody’s Investors Service in Madrid. “Telefónica has been ahead of its peer group in its international strategy. They did it right.”

Telefónica is increasingly the European operator making the best forward-looking moves. It has amassed a 9.7 percent stake in China’s No. 2 operator, China Unicom, and led a group that bought Telecom Italia, helping to bolster its position in Brazil, a key market.

If Telefónica has had better luck than its German rival in choosing markets for expansion, much of the credit for the company’s global status belongs to Cesar Alierta, the Telefónica chief executive and executive chairman since July 2000, a Columbia Business School graduate who is one of Spain’s most respected managers.

“The success of Telefónica globally is a source of pride for Spanish people,” said Jesús Banegas, the president of Ametic, the country’s largest information technology association, which includes Telefónica. Mr. Banegas worked in the early 1990s at Telefónica as it began its expansion across the Atlantic.

“Mr. Alierta is a risk-taker, but he is a manager who over time always seems to take the right risks,” Mr. Banegas said. “He has definitely proven the skeptics to be wrong.”

Choosing international expansion markets is not easy.

In the United States, the Deutsche Telekom unit T-Mobile USA, built around a former Seattle operator called Voicestream, was initially a source of profit for the Bonn-based telecommunications giant. But T-Mobile failed to keep pace with Verizon Wireless, AT&T Wireless and Sprint, and is the struggling No. 4 carrier.

Last year, Deutsche Telekom agreed to sell its U.S. business to AT&T for $39 billion, but the deal was effectively blocked by regulators and withdrawn in December.

Deutsche Telekom’s other recent foreign commitment — its €3.4 billion purchase of a 40 percent controlling stake in Hellenic Telecom, the former Greek phone monopoly that is known as OTE — could turn to dust if Greece were to leave the euro zone.

The contrast between the Spanish and German operators was stark as both released financial results last week.

Deutsche Telekom on Thursday said its global sales fell 6 percent in 2011 to €58.7 billion, or $78.1 billion, amid weakness in Europe and as it eliminated from consolidated results the revenue of T-Mobile UK, now part of a 50-50 venture with France Télécom called Everything Everywhere.

The German operator released figures that suggested pretax earnings in the United States would decline by 9 percent this year from 2011. T-Mobile USA lost 1.5 million customers last year — about 802,000 in the fourth quarter alone, when many fled to rival carriers to buy the Apple iPhone 4S, which T-Mobile USA does not sell.

A day later, Mr. Alierta reported that Telefónica’s revenue had risen 3.5 percent during the year, with the company reaching a record 306.6 million customers worldwide, up 7 percent from a year earlier.

Of those, 78 percent, or 238.7 million, were mobile phone customers. For 2012, despite ongoing weakness in Europe, Telefónica forecast that revenue would rise again by 1 percent, excluding currency fluctuations.

“We face 2012 from a position of strength, thanks to the advances we have made in the last decade to reinforce our diversification, not only geographical but also by businesses,” Mr. Alierta told investors. “For all this, we face 2012 with a lot of confidence.”

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