CASE STUDY. Defying Doom at Telefónica – Defying doom

CASE STUDY

Defying Doom at Telefónica

Telefónica’s transformation program: “Be More”

Telefónica is one of the leading telecoms companies in the world today. Established as a private company in 1924, and after many years of providing telecoms services only in Spain, from the beginning of the 1990s, Telefónica started a rapid expansion into Latin America and later into Europe, becoming one of the top players in the world. This geographical expansion and presence later proved to be a great asset to mitigate macroeconomic cycles that affected some regions in the world and not others.

With revenues above €50 billion and more than 310 million customers worldwide, Telefónica operates through its Movistar brand in Spain and Latin America, its O2 brand in the UK and Germany, and its Vivo brand in Brazil.

Telefónica is now in the middle of a massive transformation to reinvent itself once again. To better understand the need to transform, we need to build the Story behind this transformation effort as of June 2012.

During the 1990s and the first decade of the new millennium, Telefónica, like many other telecoms companies, had been enjoying significant growth, thanks to the expansion of mobile services in less developed markets such as Latin America and the appearance of broadband, first in the fixed market and later on in mobile services.

Suddenly, the explosion of the digital revolution was ripe for the picking. People had a great need to be in touch with each other and also wanted to have access to all different types of information. The Internet proved to be a great source of information to which everyone wanted to have instant access. When the “Internet” was made available through mobile devices such as smartphones and tablets, the need to be permanently in touch was even greater, making access to content a “must” in most people’s lives.

However, by June 2012 it was clear that many of the drivers that had been helping the business perform well over the last few years were undergoing significant change. Regulators was placing heavy pressure on interconnection and roaming fees, thus reducing these traditional revenue sources. At the same time, regulation was being targeted at reducing the existing market share of existing players. New entrants were emerging, positioning themselves as the low-cost providers for cost-sensitive customers. In many markets, virtual mobile players were emerging, taking advantage of the regulated wholesale prices telecoms companies were being forced to offer. New applications based on Internet protocol (IP) were offering customers novel ways to communicate through messages, voice and video. Most of these applications and services were free or almost free once the small application was downloaded onto a smartphone. A few of these new services were Blackberry Messenger, Skype, WhatsApp, Twitter, and other widely adopted social media such as Facebook and LinkedIn. The popularity of these new ways to communicate led to demand for more and more bandwidth and network infrastructure, but customers were not willing to pay increasing fees to use them. Once again, the fast pace of technological changes was threatening the status quo.

The company’s numbers were casting an ominous shadow and so a challenging transformation program was in order.

Figure 5.1 Defying Doom framework

1. Telefónica: What’s the Story?

The following pages mainly give a factual account of Telefónica seeing an iceberg, taking stock, changing course and painstakingly managing to avert collision. This process is still under way in this company and in the industry as a whole. As one of the mere mortals witnessing and contributing to this change effort, I have reported as accurately as possible on the snowballing chain of events that have allowed Telefónica to avert doom. I simply describe the actual facts and publications cited in the press in order to remain impartial. My personal reflections are limited to the margins, as they are indeed marginal and have been included only to illustrate the human and emotional responses to change in a large organization.

1.1. Building a shared sense of urgency

From a general context perspective, the macroeconomic situation in Europe and especially in Spain was not in good shape. The situation was so critical that at one point in time even the existence of the Euro as a common currency for Europe was questioned. Investors became much more risk averse and were very selective of any future investment. After almost three years of recession, Spain’s economic situation was still not looking good. It was the worst macroeconomic crisis in many decades. And the fact that Telefónica was considered a Spanish company was having negative implications for the stock price, which was trading at very low values, and the ability of the company to access financial markets.

The figures presented to shareholders after the closing of the second quarter of 2012[1] were showing some of these challenges.

On the revenue side, the Latin American operations were growing in organic terms (without considering any merger and acquisition activity or the impact of changes in foreign exchanges) and were up 6 per cent compared with the same period of the previous year. On the other side of the globe, revenues in Europe were declining at a rate higher than –7 per cent. As a consequence, overall revenues for the company were declining in organic terms by –0.5 per cent. This figure may sound very small, but given the size of the company (revenues for the first half of the year were above €30 billion) and the fact that historically the company had always been growing, any negative figure meant an immediate public and financial loss of confidence in Telefónica. We needed to keep our growth story but we suddenly had to consider whether there even was a growth story left to tell.

At the same time, the cost structure for the company was not evolving in line with revenue. Almost all expense items were still growing as a consequence of the inertia that often exists in a large-scale organization. This resulted in a negative trend in the operating income before depreciation and amortization (OIBDA) margin of –6.7% in the first half of the year compared with the same period of 2011. This margin, measured as a percentage of OIBDA income, had already fallen almost three percentage points last year, from 36.6 to 33.7 per cent.

Investments capital expenditure (CAPEX), on the other hand, had grown by 9.2%, mainly due to strong customer demand for greater network speed and the need to upgrade infrastructure to deploy new 3G networks.

Combining the OIBDA results and the CAPEX needs, the impact on operating cash flow, measured as OIBDA minus CAPEX, was a startling –13,4 per cent. At the same time, the net debt presented by Telefónica was the highest ever, reaching €58,310 million and representing 2.65 times the OIBDA.

As a consequence of this debt structure, debt agencies, including those of Standard & Poor and Moody lowered the long-term credit rating for Telefónica. This would make it more difficult for Telefónica to issue new debt and also increase the cost of the new debt issued.

Relevant fact dated 25th May 2012

“On Thursday 24th May, the credit rating agency Standard & Poor’s Rating Services (S&P’s) published its decision to lower the long-term credit rating of Telefónica, S.A. from BBB+ outlook negative to BBB outlook negative. At the same time, the rating agency’s short-term credit rating remained at A-2.”

Relevant fact dated 20th June 2012

“The credit rating agency Moody’s Investors Service published its decision to lower the long-term credit rating of Telefónica, S.A. from Baa1 to Baa2. At the same time, the rating agency’s short-term credit rating remained at P-2. Long- and short-term ratings are on review for further downgrade.”

1.2. The vision of a brighter future: “Be More”

It was time to act and start taking some key decisions.

The financial situation by June 2012 was a challenge, but there was a clear opportunity ahead of the company if the right decisions were taken. Telefónica decided to launch a transformation program — “Be More” — with the objective to become a Digital Telco and open up all of the possibilities technology has to offer to all of its customers.

This new vision for the future would help align the more than 287,000 employees.

“Personal reflection: what I want people to see is that becoming a Digital Telco is different and exciting! If we can transform into a Digital Telco, we will no longer be the mere provider of infrastructure, the dreaded “dumb pipe” or utility. Instead, we will be the nexus between people and the digital world of apps, smart cities, machine-to-machine connections and virtual management of almost everything — the world of the future! This gives people a great incentive to move forward if we can explain what we mean. Being a Digital Telco will give the opportunity to capture value and will position Telefónica as an important player in the future digital world by providing digital services to its customers. As we talk about this with employees, it is important that we all remember that we are still a telecoms provider, and therefore need to hang on to most of our existing assets such as networks, customer service centers, the customer base of over 310 million people and all of our current employees.”

As part of the “Be More” program, a clear set of strategic flagship initiatives were defined:

  1. Leverage customer insight
  2. Capture the enterprise opportunity
  3. Monetize mobile data
  4. Become a video company
  5. Rebalance the industry value chain
  6. Evolve the channel strategy
  7. Simplify the operating model
  8. Ensure the best network/ultra-broadband and all IP
  9. Transform IT
  10. Ensure financial flexibility, optimizing capital allocation
  11. Refresh and develop the talent pool
  12. Reinforce public positioning

Each initiative was clearly defined, had a clear leader behind it and was tracked regularly with clear targets and KPIs.

2. Telefónica: Who’s On Board?

2.1. Organizational changes

In September 2012, José María Alvarez-Pallete was named COO for the company. Alvarez-Pallete had a long successful track record in the company. He had been the CFO for the group when Telefónica managed to consolidate its presence in Latin America. He later became the President of all of Telefónica’s operations in Latin America and later became the President for the European operations. Still in his forties when appointed, he brought the financial discipline, operational and business expertise, and the right energy to take the company forward in such a big transformational effort.

Relevant fact dated 17th September 2012

“The Board of Directors of Telefónica, S.A., meeting today in an extraordinary session, unanimously decided to approve the proposal by the President to accordingly appoint José María Álvarez-Pallete as the new Chief Operating Officer (COO) of the company. Mr Álvarez-Pallete has until now been in charge of operations in Europe. To replace him in his position as the head of this region, Eva Castillo, until today a member of the Board of Directors of the company, has been appointed Chairwoman and CEO of Telefónica Europe, while maintaining her position on the Board of Telefónica, S.A.”

2.2. Launching “Be More”

The ideal venue to officially launch the transformation program “Be More” was the executive summit that was being planned for early July 2013. Telefónica typically gathers its top management team from around the world every 2 years. Something different needed to occur to engage the whole team strongly and make sure that everyone was aware of the need to change the current situation. A small team of executives led by the COO started planning for the event at the beginning of 2013. Instead of having a traditional summit where every Executive Committee member shared his or her views on a particular topic, the team decided to make use of an internal social media network (Telefónica was widely adopting Yammer) to initiate a debate around strategic issues and engage executives before arriving at the summit meeting. A 90-day virtual summit was planned that would end in the traditional 2-day event attended by the top 1300 executives in Madrid.

In order to make the virtual summit meaningful, 12 strategic topics were selected around the strategic initiatives identified as part of the Program. Using Yammer, all 12 topics were briefly presented and executives around the world were asked to express their concerns, and share their thoughts and insights around each one of them.

In order to get people on board, a few real-time debates with the COO were held. These ensured that everyone got used to the new tool and the new way to communicate. Since not everyone was used to using social media on a regular basis, a support team was set up behind the scenes to provide assistance to anyone who required it. Logistical aspects of the summit were only communicated through the social media network, thus forcing everyone to interact and participate online.

Each strategic topic was allotted 3 days out of the 90-day build-up. This approach concentrated the debate on each specific topic, avoiding having to drag out all 12 topics throughout the 90 days.

Productive and interesting feedback was gathered for strategic topics such as the future of Customer Insight, Networks, Devices, IT, Channel strategy and Talent among others. Participation across the executive population was moderate but positive: 25 per cent of executives were openly sharing their ideas and suggestions. Considering that it was the first time this type of exercise was conducted I think the result was very good. In addition to the group of executives who were more active on the social network, we also confirmed that many more were following the debates and reading all of the comments. This is similar to the behavior in other social networks where there are a few active members who create a lot of content and many others who participate very little but read through and follow the conversations.

As a consequence of the previous online debate, the actual presentations during the summit were shorter than usual, since everyone had in some way already been involved during the previous 90 days in the discussions. Each presentation had to be between 5 and 7 minutes long. Additionally, information and feedback gathered during the online debate was explicitly shown and used during the final presentation at the summit, making it clear that the top management was really willing to listen to everyone’s feedback and input.

Results for the summit were excellent: the ranking of the feedback after the summit was the highest ever received and it set the right tone to engage all executives and align them around the need to transform the company.

2.3. Rolling out “Be More”

Once the program was officially launched and shared among the top 1300 executives from all operations, we needed to continue sharing the context of the company with all employees. The internal communications team redirected all existing channels and content around the “Be More” program, and several initiatives were launched in parallel to reinforce the message of urgency and the vision of a Digital Telco for the future.

2.4. Leveraging Universitas Telefónica

Telefónica has one of the best corporate universities in the world. Located north of Barcelona, it is in the middle of a beautiful forest in the hills of Granollers. Using the onsite hotel with 180 rooms, it is used all year to host leadership development activities for executives, managers and top talent in the group. Annually, several thousand employees attend programs and strategic business meetings to discuss the future of the company and better understand the rationale behind the decisions taken. Programs and meetings tend to be a whole week long, allowing leaders from around the business to interact with each other and learn from each other’s experiences.

The programs are adapted to make sure that they reflect the business context of the company and the company’s vision for the future. Every week, several senior executives from the company attend and hold talks with participants to present and discuss ideas around the current strategy and the future of the company.

A specific program around the need to change was developed. Leadership for Change exposes participants directly to the reality of the company’s situation and the need to change. The program is based on the framework introduced in this book, allowing participants to understand the elements that need to come together to guarantee a successful transformation.

Given the success of the program on campus, the Universitas team started to roll out this program across most of the company’s operations, reaching many more employees and managers in a direct way without the need to fly them into Barcelona for the on-campus editions.

2.5. “Be More” workshops

After the “Be More” program had been shared with all of the executives at the July 2013 management summit, all local CEOs and executive teams were asked to share the same program with all of their managers and middle managers at each local operation. A communications pack was developed as a guide in the communications process and was given to all local teams working on the rollout of the program. Each local operation added their local flavor to make it more relevant for the employees, but always maintained the overall picture of the situation Telefónica was in and the need to transform into a Digital Telco.

2.6. “Be More” online program

Telefónica widely used e-learning to train employees in an effective, efficient and digital way. It leveraged its subsidiary Telefónica Learning Services’ (TLS’s) platform and e-learning knowhow to develop specific content around the “Be More” program and made it available to all employees.

A Massive Open Online Course (MOOC)-type program was developed to provide a disruptive experience to all employees, including gaming activities (tablets and smartphones were given as prizes), so that everyone could learn about the transformation program. Challenges were presented to the participants who could interact in “online” forums with other colleagues or facilitators to get the right answers. In or der to make progress through the program, each participant had to take a test to make sure that the basic concepts were incorporated. The program was available in Spanish, Portuguese, English and German, and participants could access it from their desktops, tablets or smartphones.

The progress of the program was tracked on a daily basis allowing us to know how many employees were participating and the level of progress per country. This initiative allowed several thousand employees to receive all of the details of the program in a very efficient, effective and digital way.

Each of the previous initiatives was structured in such a way that feedback was permanently received during and after the programs.

3. Telefónica: Execution

The situation of the company had become unsustainable, as a consequence of all the factors identified before (new competitors emerging, unfavorable regulation, pressure on financial results, need to access financial markets when investors became more risk averse, while investing in new technologies to keep up with the speed of the market). Execution became crucial.

Several decisions were taken such as suspending the dividend, a program to sell non-strategic assets and therefore allow the net debt to be reduced, the refinancing of all debt maturities, and reorganizational changes together with an internal transformation program to reduce complexity within the business and adapt the cost structure of the company to the new market reality.

3.1. Suspending the dividend

One of the first measures the Board of Directors decided on was the temporary suspension of the dividend payout. The payouts that would have occurred in November 2012 and May 2013 would be cancelled, and the dividend payment would be reestablished in November 2013, making sure that all calendar years would still have at least a partial dividend payout (May 2012 had already been paid). This was a significant decision considering that many investors, both institutional and private, relied heavily on Telefónica’s historic dividend.

There is no doubt that this was the biggest signal both internally and externally that difficult decisions were about to come and that the context the company was in required tough calls.

Relevant fact dated 25th July 2012

“The Board of Directors has decided that under the criteria of prudent administration it is in the best interest of all Telefónica’s stakeholders that the dividend and share buyback program corresponding to 2012 be cancelled (including November 2012 and May 2013 cash and scrip payments, respectively) as a one-time exceptional measure.

The company will resume its shareholder remuneration in 2013 by paying a dividend of 0.75 euros per share. The company intends to pay in two tranches: a first payment in Q4 2013 and a second one in Q2 2014.

Also, with regard to the compensation of the Members of the Board, the Board of Directors has decided to apply a reduction of 20% to their compensation. With respect to the Executives, including the Chairman, the remaining Executive Directors and the Senior Executives, there will also be a reduction of around 30% of their total compensation as a result of (i) the reduction of their remuneration in kind due to the fact that no shares will be vested under the share plan (PSP) and (ii) other reductions already carried out during the first half of the year.”

3.2. Selling non-core assets

Cutting the dividend would not be enough to revert and improve the financial situation of Telefónica. Therefore, an explicit program to sell non-core assets was announced in order to reduce the total amount of financial debt and improve the balance sheet. This would also help us to focus on the markets identified as core.

Relevant fact dated 30th May 2012

“The Board of Directors of Telefónica, at its meeting held today, has decided to proactively manage the company’s assets portfolio, accelerating the disposal process of non-core assets.

Likewise, the Board of Directors has analyzed and reflected upon the distribution mix of 2012 shareholder remuneration.

All these measures reflect the company’s commitment to increase its financial flexibility and reach a leverage ratio (measured as net debt/OIBDA) below 2.35 in 2012, while maintaining attractive remuneration for its shareholders.”

3.3. Selling Atento

Atento was Telefónica’s subsidiary focused on the prevision of call center services.

Created more than 10 years ago, it had more than 150,000 employees, with offices in most of the countries where Telefónica operated, and provided services to almost all of Telefónica’s operating businesses and also to third parties. At the time, it was a profitable company with a positive OIBDA, but was not considered a strategic asset in the longer term. As part of the program to sell non-core assets, Telefónica proactively searched for potential buyers of the business and finally reached an agreement with Bain Capital to sell the company for approximately €1 billion.

Relevant fact dated 11th July 2012

“Telefónica, S.A. continues the divestment process of its stake in its subsidiary, Atento Inversiones y Teleservicios, S.A. Unipersonal, having received as part of that process several proposals from third parties, whose terms and conditions are being analyzed by the company.”

Relevant fact dated 12th October 2012

“Telefónica, S.A. has reached a definitive agreement with companies controlled by Bain Capital for the sale of its Customer Relationship Management (CRM) business, Atento.

The enterprise value of the transaction amounts to €1039 million, including a €110 million contingent deferred payment and vendor financing provided by Telefónica for an amount of €110 million. Furthermore, a Framework Agreement for the provision of services has been signed to govern the relationship of Atento as a service provider to the Telefónica Group for a 9-year period.

The transaction is subject, among other conditions, to the relevant regulatory authorizations and is expected to be completed by no later than 31st December 2012.”

Significant event dated 12th December 2012

“Following the significant event published on 12th October 2012, related to the definitive agreement reached between Telefónica, S.A. and certain companies controlled by Bain Capital for the sale of its CRM business, Atento. Telefónica informs that once the relevant regulatory authorizations have been obtained, the transaction will be completed.

The enterprise value of the transaction amounts to €1051 million, including a vendor loan of €110 million as well as certain deferred payments of €110 million.

Among the accounting impacts arising from the transaction, it is worth mentioning the positive effect of the reduction of the Telefónica Group’s indebtedness, which is estimated at approximately €812 million as of the date of the closing of this transaction, plus subsequent improvements in debt in the following years as the deferred payments are made.

As additional information, the company informs that the capital gain is estimated to amount to approximately €61 million.”

3.4. Reducing the equity stake in China Unicom

Telefónica had a strategic financial position as a shareholder of China Unicom, one of the top three telecoms players in China, owning 9.57 per cent of the company. Telefónica still believed that keeping the investment was strategic in the longer term, but needed to improve its financial position and reduce its debt, and therefore decided to reduce the equity participation.

Before the end of July 2012, Telefónica sold 4.56 per cent of the company (almost half of the stake held) to China United Network Communications Group Company Limited for approximately €1.14 billion.

Relevant fact dated 10th June 2012

“Telefónica, S.A. and China United Network Communications Group Company Limited (“Unicom Parent”) have signed a definitive agreement under which the latter will acquire 1,073,777,121 shares of China Unicom (Hong Kong) Limited (“China Unicom”), owned by Telefónica (equivalent to 4.56% of the share capital of China Unicom), at a price of HK$10.21 per share, for a total amount of HK$10,963.3 million, approximately €1128.9 million at the current exchange rate.

This transaction will allow Telefónica, S.A. to increase its financial flexibility, while at the same time, it will continue to be a key shareholder of China Unicom, with a 5.01% stake.

Telefónica has undertaken not to sell over a period of 12 months from the date of the agreement its remaining shares of China Unicom.

Furthermore, Mr César Alierta, Chairman of Telefónica, S.A. will continue to be a Board Director of China Unicom, while Mr Chang Xiaobing, Chairman of China Unicom, will remain as a member of the Board of Directors of Telefónica, S.A.”

Relevant fact dated 30th July 2012

“Following the significant event published on 10th June 2012, related to the agreement between Telefónica, S.A. (through its 100% subsidiary, Telefónica Internacional, S.A.U. — hereinafter “Telefónica”) and China United Network Communications Group Company Limited (through a 100% owned subsidiary), for the acquisition by this latter company of 1,073,777,121 shares of China Unicom (Hong Kong) Limited, owned by Telefónica (equivalent to 4.56% of the share capital), the company informs that, after obtaining the relevant regulatory authorizations, the transaction has been completed, Telefónica having received HK$10,748 million (approximately €1142 million).”

3.5. Merging fixed and mobile operations in Colombia

Telefónica owned 100 per cent of the mobile subsidiary in Colombia (Telefónica Moviles Colombia, S.A.) that operated under the Movistar brand. Telefónica also held a relevant equity stake in Telecom Colombia, a joint venture with the Colombian Government offering fixed telecoms services in the country. Offering customers converged fixed and mobile services was a global trend and most telecoms players were moving in that direction, proving strategically that customers wanted a single provider for all telecoms services.

In Colombia, Telefónica signed a strategic agreement with the Government to merge both companies, retaining 70 per cent of the combined entity with the Government controlling the other 30 per cent of the new combined entity. As a consequence, Telefónica was able to reduce it’s net financial debt by approximately €1.45 billion.

Relevant fact dated 2nd July 2012

“Telefónica, S.A. hereby reports that following the agreement reached in March with the Colombian Government, as of 29th June the closing of the merger process between Telefónica Móviles Colombia, S.A and Colombia Telecomunicaciones, S.A. ESP has taken place. Consequently, Telefónica holds 70% of the share capital of the resulting company while the Government controls the remaining 30%.

As a result of the merger, consolidated net financial debt of Telefónica will be reduced at the end of the second quarter of 2012 by approximately €1450 million.”

3.6. Selling Hispasat

Telefónica held an equity stake in Hispasat and sold it for €124 million to Abertis Telecom, S.A. and Eutelsat Services & Beteiligungem GmbH.

Significant event dated 10th January 2013

“On 21st February 2012, a significant event was filed, reporting that Telefónica de Contenidos, S.A.U., a company wholly owned by Telefónica, S.A., had reached an agreement with Abertis Telecom, S.A. to sell the stake of Hispasat S.A. owned by Telefónica de Contenidos, S.A.U.

Following the exercise of the preferential right of acquisition by the German company Eutelsat Services & Beteiligungem, GmbH, and after obtaining the necessary authorizations from the Council of Ministers on 28th December 2012, Telefónica de Contenidos, S.A.U., as of today:

- Has transferred to Abertis Telecom, S.A. 23,343 shares of Hispasat, S.A. for a total price of €68 million, which has been received in cash, and

- Has signed a contract with Eutelsat Services & Beteiligungem, GmbH for the sale of its remaining stake in Hispasat, S.A., that is 19,359 shares of that entity, for a total price of €56 million, subject to approval of foreign investment, in accordance with Royal Decree 664/1999, of 23rd April, on the Legal Regime of foreign investment [Régimen Jurídico de las Inversiones Exteriores].

The capital gain, for both transactions is estimated to amount to approximately €47 million.

Significant event dated 18th April 2013

On 10th January 2013, a significant event was filed, reporting that Telefónica de Contenidos, S.A.U., a company wholly owned by Telefónica, S.A.:

(i) has transferred to Abertis Telecom, S.A. 23,343 shares of Hispasat, S.A. for a total price, in cash, of €68 million, and

(ii) has signed a contract with Eutelsat Services & Beteiligungem, GmbH for the sale to this company of its remaining stake in Hispasat, S.A., subject to approval of foreign investment, in accordance with Royal Decree 664/1999, of 23rd April, on the Legal Regime of foreign investment [Régimen Jurídico de las Inversiones Exteriores].

After obtaining the aforementioned authorization of foreign investment, Telefónica de Contenidos, S.A.U., has transferred today its remaining stake in Hispasat, S.A. to Eutelsat Services & Beteiligungen, GmbH, that is, 19,359 shares of that company for a total price of €56 million, which has been received in cash.

The capital gain for both transactions will be €47 million (of which, €26 million correspond to the sale of the shares of Hispasat, S.A. to Abertis Telecom, S.A., and has been already registered in the results for the year 2012).”

3.7. Selling 40 per cent of Central American operations

Telefónica was present in Central America with operations in Guatemala, El Salvador, Panamá and Nicaragua. A new green field operation was started in Costa Rica that completed the company’s presence in the region. The entire region was managed centrally from the regional Headquarters in Guatemala City. As part of the debt reduction Program, a 40 per cent stake of the Guatemala, El Salvador, Panamá and Nicaragua operations was sold to Corporación Multi Inversores (CMI), a family-held multinational corporation with over 36,000 employees in three continents that began operations almost 90 years ago in Guatemala and today is one of the most prominent corporations in Latin America.

Significant event dated 30th April 2013

“Telefónica, S.A. has reached an agreement today with Corporación Multi Inversiones (“CMI”), to sell 40% of Telefónica’s stake in the Guatemala, El Salvador, Nicaragua and Panama operations.”

Significant event dated 19th July 2013

“Following the significant event published on 30th April 2013, related to the agreement reached between Telefónica, S.A. (hereinafter, Telefónica) and Corporación Multi Inversiones (“CMI”), for the sale of 40% of Telefónica’s stake in the Guatemala, El Salvador, Nicaragua and Panama operations, Telefónica informs that the conditions to which the transaction was subject have been met.

In this regard, it is expected that in accordance with the provisions of the aforementioned agreement, the transaction will be completed in the coming days.”

3.8. Initial public offering for the German operation

The German business operation was presenting a big challenge. Telefónica, through its O2 brand, was fighting for the third position in the marketplace with E-Plus, the subsidiary of the Dutch KPN operator. The main players in the market were Deutsche Telekom with its mobile subsidiary T-Mobile, and Vodafone.

It was clear that Telefónica had to increase its market position by consolidating its presence through acquisition. Its financial position did not allow the company to go to the market to issue any additional debt if an opportunity arose. At the same time, the German operation needed cash to maintain its market presence and to roll out the new 4G network needed to support the substantial growth in data traffic. That is why the company decided to prepare and execute an initial public offering (IPO) of the German company’s shares. More than 23 per cent of the equity would be placed and the expected amount of cash received from the market offering was almost €1.5 billion.

Relevant fact dated 3rd October 2012

“Telefónica Group is preparing a public offering of Telefónica Deutschland Holding A.G. (the “Company”) that is expected to take place during the fourth quarter of 2012. The Company aims to list its shares on the regulated market (Prime Standard) of the Frankfurt Stock Exchange.

As of today, the percentage of equity to be placed in its public offering has not yet been determined, but in any case, Telefónica Group will remain the majority shareholder of the Company.”

Significant event dated 16th October 2012

“Further to the communication filed on 3rd October 2012 (significant event number 174327), Telefónica, S.A. hereby reports that the number of shares in its subsidiary Telefónica Deutschland Holding A.G. (the “Company”) to be offered in the IPO, and the offer period and the price range within which investors may submit purchase orders has been determined. The commencement of the offer period is subject to the prior approval of the securities prospectus by the German Federal Financial Supervisory Authority [Bundesanstalt für Finanzdienstleistungsaufsicht — BaFin] and, once approved, the prospectus will be available at the Company’s website.”

Significant event dated 29th October 2012

“Telefónica, S.A. hereby reports that the shares offered to the market in the IPO of its subsidiary Telefónica Deutschland Holding A.G. were placed at a price of €5.60 per share. The total volume of the offering amounts to 258.75 million shares (including 33.75 million over-allotted shares in connection with the greenshoe option granted to the underwriters). The total placement volume of the offering, including the greenshoe option represents 23.17 per cent of the share capital of Telefónica Deutschland Holding A.G.

Upon full exercise of the greenshoe option, the placement volume would amount to €1449 million.

The first day of trading of the shares of Telefónica Deutschland Holding A.G. on the regulated market (Prime Standard) of the Frankfurt Stock Exchange is expected to be tomorrow, 30th October 2012.”

3.9. Purchase of E-Plus in Germany

The next step in the consolidation of the German market was to use the floated German subsidiary to acquire KPN’s subsidiary E-Plus.

Significant event dated 23rd July 2013

“Telefónica and its German listed subsidiary Telefónica Deutschland Holding A.G. have signed an agreement with Koninklijke KPN N.V., under which Telefónica Deutschland will acquire the German subsidiary of KPN, E-Plus Mobilfunk GmbH & Co. KG. KPN will receive a stake of 24.9% in Telefónica Deutschland and a cash consideration of €3700 million.

Subsequently, Telefónica will acquire 7.3% of Telefónica Deutschland from KPN for a total price of €1300 million, and the ownership of KPN in Telefónica Deutschland will be reduced to 17.6%.”

Significant event dated 26th August 2013

“In relation to the agreement entered into on 23rd July 2013 by and between Telefónica, S.A., its German subsidiary Telefónica Deutschland Holding A.G. and the Dutch company KPN for the acquisition by Telefónica Deutschland of the German subsidiary of KPN, E-Plus, Telefónica, S.A. confirms that América Móvil, S.A. de C.V. (reference shareholder of KPN) has irrevocably committed to vote in favor of the transaction at the Extraordinary Shareholder Meeting of KPN.”

3.10. Selling of the Czech Republic and Slovakia operations

Telefónica operated in the Czech Republic and Slovakia under the O2 Brand. Telefónica ran a converged fixed and mobile operation in the Czech Republic where the group had been present since 2005 when Cesky Telecom was bought even before the acquisition of the O2 assets in Europe. The operation in Slovakia was started back in 2006, when Telefónica was granted a mobile license, as a green field mobile only operation and was managed from Prague. Telefónica served, at the end of June 2012, around 9.0 million customers in the Czech Republic and Slovakia, and had revenues for the first half of the year of €1.0 billion. Before the end of 2013, Telefónica had reached an agreement with the local investor group PPF to sell 65.9 per cent of the equity of the company for almost €2.5 billion.

Significant event dated 15th October 2013

“In relation to the news published today, Telefónica states that it is considering strategic alternatives regarding its stake in Telefónica Czech Republic, including conversations with the investor group PPF, not having certainty with respect to the feasibility of reaching an agreement, nor with respect to the eventual terms and conditions of such an agreement.”

Significant event dated 5th November 2013

“Following the significant event published on 15th October 2013 (under registration number 193892), Telefónica announces that it has reached an agreement to sell 65.9% of Telefónica Czech Republic, A.S. (hereinafter Telefónica Czech Republic) to PPF Group N.V. (hereinafter PPF) for approximately €2467 million in cash (CzK306 per share). The aforementioned consideration will be paid in two tranches:

(i) €2063 million in cash up front at closing of the transaction; and (ii) €404 million in cash as deferred payments over a 4-year period.

Additionally, Telefónica will receive, prior to delivering the shares, an amount of €260 million, corresponding to the distribution to shareholders approved by the General Shareholders Meeting of Telefónica Czech Republic, to be paid on 11th November 2013.

As a result of this transaction, Telefónica will maintain a 4.9% equity stake in Telefónica Czech Republic and will remain as the company’s industrial and commercial partner for 4 years:

- Telefónica Czech Republic will be renamed but will continue using the O2 brand for up to 4 years.

- In addition, the company will become part of Telefónica’s Business Partners Program.

In connection with this transaction, PPF will launch a mandatory tender offer. Telefónica will maintain its 4.9% but may dispose of the shares upon completion, subject to certain restrictions.Furthermore, the agreement establishes a put/call option structure in relation to the Telefónica Czech Republic shares that Telefónica holds after 4 years. In addition, the agreement includes tag along/drag along clauses.

Closing of the transaction is subject to obtaining the relevant regulatory authorizations.

Among the accounting impacts arising from the transaction, it is worth mentioning the positive effect of the reduction of Telefónica Group’s indebtedness estimated at approximately €2685 million, due to the present value of the amount to be paid by PPF and the amount to be received as a result of the distribution to shareholders.

Furthermore, the transaction will generate a capital loss of about €56 million in the third quarterly financial statement for the year 2013.

With this transaction, Telefónica continues executing on its strategy of focusing on its core markets and optimizing financial flexibility.”

Significant event dated 28th January 2014

“Following the significant event published on 5th November 2013 (under registration number 194845) in relation to the agreement reached between Telefónica, S.A. (hereinafter Telefónica) and PPF Group N.V., for the sale by Telefónica of a 65.9% stake of Telefónica Czech Republic, A.S., Telefónica announces that after obtaining the relevant regulatory approval the transaction has been completed.”

3.11. Selling of operations in Ireland

Telefónica operated in Ireland under the O2 brand since buying the O2 operations in Europe (UK, Ireland and Germany) back in 2006, and at the end of June 2012 it had 1.6 million customers with revenues for the first 6 months of 2012 of €313 million. The Irish business was struggling to remain profitable and competitive in a market with four strong players and very aggressive price competition. The future of this operation was not considered strategic and therefore Telefónica went in search of potential buyers. During June 2013 Telefónica announced that it had reached an agreement with Hutchinson Whampoa Group to sell 100 per cent of the Irish business for €850 million.

Significant event dated 24th June 2013

“Telefónica, S.A. has reached an agreement with Hutchison Whampoa Group, for the sale of its 100% participation in Telefónica Ireland, Ltd.”

Significant event dated 15th July 2014

“Telefónica informs about the sale of its subsidiary, Telefónica Ireland, Ltd. to the Hutchison Whampoa Group. Following the significant event published on 24th June 2013 (under registration number 189704), in relation to the definitive agreement reached between Telefónica, S.A. (hereinafter Telefónica) and Hutchison Whampoa Group for the sale of its 100% participation in Telefónica Ireland, Ltd, Telefónica informs that, once the relevant regulatory authorizations have been obtained, the transaction will be completed.

The value of the sale amounted to €850 million, including an initial cash consideration of €780 million received at the closing of the transaction, and an additional deferred payment of €70 million based on the completion of agreed financial objectives. The corresponding debt reduction will be recorded in the third quarter of 2014.

The closing of the transaction has no impact on the 2014 results.”

3.12. Debt reduction program

During the next few months, Telefónica embarked on a huge program to refinance its current debt structure, postponing the maturity dates of the debt. Telefónica needed to prove to the financial markets that it had the right liquidity to face potential adverse times in the future.

At the same time, as a consequence of the divestiture of non-core assets and a strict internal operating cash flow policy, Telefónica was able to reduce the net amount of debt from the high €58.3 billion in June 2012 to €43.8 billion 24 months later, as announced in the 2014 second quarter results. Reducing the debt by €14.5 billion in such a short time was a huge step forward and proof to the market that the company was capable of reacting to the new environment.

3.13. Reestablishing the dividend

Before the end of 2013, and as announced more than a year earlier when Telefónica decided to temporarily suspend the dividend, the dividend payment was reestablished for all shareholders.

Significant event dated 25th September 2013

“The Board of Directors, at its meeting held today, and pursuant to the resolution adopted by the Shareholders’ Meeting of Telefónica, S.A. held on 31st May 2013, has set 6th November 2013 as the date for the dividend distribution charged to Unrestricted Reserves, of a fixed gross amount of €0.35 for each company share issued, in circulation and carrying entitlement to this distribution.

The payment of this dividend shall be executed from 6th November 2013 through the participating entities in IBERCLEAR (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.), the Spanish securities registrar, clearing and settlement company.

This payment is part of the commitment announced by the company to pay a dividend of €0.75 per share for 2013. The second tranche of this dividend will be paid in the second quarter of 2014.”

Significant event dated 30th October 2013

“Following the significant event published on 25th September 2013 (under registration number 193172), in relation to the decision adopted by the Board of Directors and the resolution adopted by the Annual General Shareholders’ Meeting of Telefónica, S.A., at its meeting held on 31st May 2013, we hereby inform all shareholders that on 6th November 2013, the company will pay a dividend to be charged to Unrestricted Reserves, of a fixed gross amount of €0.35 for each company share issued, in circulation and carrying entitlement to this dividend (Record Date: 5th November 2013). This payment will be made as follows, in all events subject to the provisions of the applicable tax legislation:

- Gross dividend (Euros per share) 0.35

- Withholding tax rate (21%; Euros per share) 0.0735

- Net dividend (Euros per share) 0.2765

The payment of this dividend shall be executed from 6th November 2013, by Banco Bilbao Vizcaya Argentaria, S.A., through the participating entities in IBERCLEAR (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.), the Spanish securities registrar, clearing and settlement company.”

Significant event dated 27th February 2014

“The Board of Directors of Telefónica has agreed, regarding the 2014 dividend, to determine the amount thereof at 0.75 euros per share, payable in two tranches:

- €0.35 per share by means of a “scrip dividend” in the fourth quarter of 2014

- €0.40 per share in cash in the second quarter of 2015”

Significant event dated 11th April 2014

“Further to the significant event filed on 27th February 2014 (under registration number 200975), it is hereby announced that it is the company’s intention to carry out the payment of the next cash dividend amounting to €0.40 per share on 7th May 2014.

The adoption of the corresponding corporate resolutions will be proposed in due course.”

Significant event dated 25th April 2014

“Further to the significant event released on 11th April 2014 (under registration number 203418) and pursuant to the resolution adopted by the Board of Directors, we hereby inform all shareholders that on 7th May 2014, the company will pay an interim dividend from the 2014 net income, of a fixed gross amount of €0.40 for each company share issued, in circulation and carrying entitlement to this dividend.”

3.14. A new organization in place

Telefónica was moving in the right direction, but by the beginning of 2014 a new structure was introduced in order to gain faster momentum and speed up the transformation program. Chairman César Alierta made a public announcement introducing important changes in the organization’s structure. The objective was to bring the key markets closer to the Executive Committee and consolidate two new roles, the Chief Commercial Digital Officer to focus on the revenue growth and the Chief Global Resources Officer to drive efficiencies 
and economies of scale across the Group. The CEOs for Spain, Germany, the United Kingdom, Brazil and the Latin American unit, now excluding Brazil, would start to report directly to the COO of the company. The historical European and Latin American regions were eliminated and all corporate centers that supported these regions were merged into a single global corporate center. At the same time, a public commitment to the market was announced to generate, by 2017, savings of €1.5 billion in operating cash flow from the baseline of 2013 as a result of reducing both operating expenses and capital expenditures.

Press release — 26th February 2014

“Alierta sets the goals of improving revenue, saving costs, modernizing networks and systems, and reinforcing Telefónica’s leadership of the digital ecosystem

Telefónica maps four strategic axes driving its total transformation into a leading Digital Telco in terms of growth and efficiency

The Company is introducing a new, totally customer-centered operating model, incorporating digital offerings into all of its commercial activity.

Madrid, 26th February 2014. The president of Telefónica, César Alierta, has today announced the four basic pillars of the Company’s strategy to become the leading Digital Telco and an industry benchmark for its growth and efficiency.

Alierta commented that Telefónica is at the center of the digital revolution and has great growth potential, through the capture of new business opportunities linked to the development of this ecosystem. “We have witnessed”, he said, “a real explosion in data traffic over both fixed and mobile lines. But the deployment of LTE, the massive adoption of connectivity on all kinds of devices, the new digital services and the growing use of video have all made the growth seen in recent years pale into insignificance when compared with the volume of mobile data traffic we are going to see over the next 5 years, which is expected to multiply by 11 in 2013.”

In the opinion of Telefónica’s President, the company’s new strategy is supported by four pillars in the short term:

- Growing revenue, by extending the commercial offering to new services in the digital world.

- Modernizing networks and systems, through accelerating the deployment of the most modern technologies: fiber and LTE, and the deep transformation of systems.

- Increasing efficiency through simplification and cost cutting, as well as ongoing financial discipline and prioritizing investment in growth projects that generate added value.

- Strengthening leadership in the digital ecosystem, by driving a new public positioning enabling the hypersector to re-establish the balance in the value chain.

To achieve this, Telefónica has implemented a new organizational structure, which was approved at today’s Board meeting of the company, one that is completely focused on clients and incorporates this digital offering as the main focus for commercial policies.

The structure gives greater visibility to local operations, bringing them closer to the corporate decision-making center, simplifying the global structure and strengthening the cross-disciplinary areas to improve flexibility and agility in decision making.

Within this framework, Telefónica has created the role of Chief Commercial Digital Officer, who will be responsible for fostering revenue growth. On the cost side, the company has strengthened the role of the Chief Global Resources Officer in order to capture gross savings of up to €1.5 billion in the next few years, plus the synergies’ plan in Germany. Both officers will report directly to the COO, as will the local business CEOs for Spain, Brazil, Germany and the United Kingdom, in addition to the Latin American Unit, now without Brazil.

The new model integrates the activities carried out to date by Telefónica Digital, Telefónica Europe and Telefónica Latam into the Global Corporate Center, thus simplifying the organization.

The success to date of the policies implemented by the regional units in Europe and Latin America, as well as by the digital unit, has made it possible to set new growth and efficiency targets.

- Telefónica Digital, created in September 2011, under the presidency of Matthew Key, to capture digital opportunities, has duplicated its value since then and has achieved incremental revenues to reach a growth of nearly 20%. In this way, it has become the seed for the Telefónica of the future.

Telefónica Europe, under the leadership of Eva Castillo, has pioneered market consolidation and improved operational profitability by accelerating investments in growth opportunities such as fiber, pay TV, LTE and digital services.”

3.15. Network sharing agreements

The increase of smartphone and tablet usage together with the massive adoption of communication applications by customers was driving data traffic growth. As a consequence, the demand for bandwidth was increasing and all telecoms operations were under pressure to increase network capacity to cover the traffic demand. Traditionally, each telecoms company would build it’s own network, but financial constraints and increasing deployment costs were forcing telecoms providers to seek new and efficient ways to deploy networks to reduce capital expenditure and operating costs. Telecoms players that were considered competitors in particular markets were starting to build networks together and share their existing infrastructure. Along these lines, Telefónica signed an agreement with Vodafone in the UK to share networks.

Relevant fact dated 7th June 2012

“Telefónica and Vodafone have announced their intention to strengthen their existing network collaboration in the United Kingdom.”

3.16. Simplifying the commercial offer

Simplification programs were launched in all countries and special attention was placed on simplifying the product portfolio. Traditionally, telecoms players would be sitting on thousands of historical data and voice plans with many different associated tariffs and pricing schemes. It was uncommon to eliminate or replace old programs, and after several decades of launching new products and services it was common to find thousands of these plans in the company’s systems. This brought additional challenges to the IT infrastructure and systems because they had to be able to manage these thousands of combinations. It also presented a massive challenge for call centers and customer service representatives because they had to be prepared and trained to be able to sort out any issue that could arise for any of the existing plans. Not doing so would only increase the level of dissatisfaction of those customers calling in for help. Telefónica was not an exception to this rule, and understood that this simplification effort around the product portfolio was a priority. Some business units set out specific plans to cut up to 90 per cent of the existing tariffs and plans.

At the same time, the convergence of fixed, mobile and video services was becoming more important, and customers were demanding a simpler and combined offer for all of their services. As an example, the Spanish business unit launched “Fusion”, a simple combined offer for all products where customers could reduce the total amount of money spent and add additional mobile lines for family members. The results were very good. Simplifying the offer and making it easier for customers also reduced dramatically the number of calls to customer services.

* * *

At the time of publishing, Telefónica is still in the middle of its transformation program “Be More”. While it is challenging to quantify and measure the results of the many actions described in this account (and others that are not mentioned), we have a series of tangible results: some are in the form of performance indicators such as reduced debt or an increase in organic revenue; others are more qualitative, such as the fact that when we ask groups how the company is doing, employees no longer cite double-digit growth when in reality growth is negative or only very slightly positive. It is my (and others leading this transformation’s) interpretation that having a clear story behind our need for transformation with a clear vision of the future, meticulous focus and unquestioned priorities has already allowed the company to be in a much stronger financial position than it was 2 years ago. Simplification is at the heart of the transformation. The decisive execution of many of the iconic decisions taken in the first few months has given the program great credibility. I place my bets on a “coda” to this work that will chronicle the successful denouement of this transformation effort and the next era of Telefónica’s success.