Telefonica Earnings: Stable Profits and Launches Takeover of O2D; 2026 Guidance Achievable

We maintain our no moat rating and EUR 4.90 fair value estimate after Telefonica’s TEF third-quarter results and capital markets day. It achieved 2.5% organic revenue growth, which translated into 3% EBITDA growth, helped by cost controls. The strongest organic revenue growth was recorded in Germany and Brazil at 2.2% and 7.5%, respectively. In Spain, the EBITDA growth trend keeps improving with negative 0.5% in the third quarter after four quarters at negative 1%-3%.

On Nov. 7 Telefonica launched an offer to acquire the remaining 28% share capital of Telefonica Deutschland, or O2D, that it does not own. The offer is EUR 2.35 per share in cash, which represents a 38% premium compared with the Nov. 6 closing price. The acquisition comes only 3 months after Telefonica lost 1&1 as a wholesale customer, which will use Vodafone’s network from 2026 onward. Shares of O2D declined by 25% in August (the impact of estimated free cash flow was EUR 200 million), but they have now recovered their lost value given the update on the transaction. We estimate O2D will be acquired at around 5 times the trailing 12-month enterprise value/EBITDA, adjusting for the loss of the 1&1 contract.

Telefonica also issued medium-term guidance until 2026. It expects 1%, 2%, and 10% annual growth in reported revenue, EBITDA, and free cash flow, respectively. We believe this guidance is achievable and Telefonica could have been more ambitious in its cost-cutting and hence EBITDA growth guidance. Its double-digit free cash flow growth is driven by a reduction in capital expenditure. Capital expenditure/revenue is expected to be below 12% from 2026 onward (14% so far in 2023), given most of the 5G and fiber-to-the-home rollout has already been completed in Telefonica’s core markets.