In an earlier article in June, I made a statement that Telefonica (TEF) would be a very interesting investment, as I felt the company was severely undervalued and most investors chose to ignore the reinstatement of the dividend.
Since that first article, the share price of Telefonica (in USD) has increased by 25% to a closing price of $16.79 as of Friday evening. In this article I'll briefly give my opinion about the recently announced M&A deals, as well as why and how I'm taking some profits off the table.
The M&A deals
In July, Telefonica announced an agreement with Amsterdam-listed KPN (OTCPK:KKPNY), whereby Telefonica would acquire KPN's E-Plus and merge it with its O2-subsidiary in Germany. This move was widely applauded as the synergy of a combined entity would be huge, and Telefonica would be able to cut some costs. The price tag is very decent as Telefonica will pay for the acquisition both in cash and shares, and has repeated this transaction will not interfere with its aim to continue to reduce its debt load by the end of this year. As the KPN shareholders (America Movil (AMX) included) have accepted the (sweetened) offer, I consider this to be a 'done deal'.
Independently from this, Telefonica announced it will increase its ownership in Telco (which owns 22.4% of Telecom Italia (TI) ) to 66% by coughing up $437M for new non-voting shares. When this capital injection in Telco will be completed, Telefonica will indirectly own approximately 15% of Telecom Italia, as Telefonica is aiming to control more assets in South America.
Why I'm taking some profits off the table
As Telefonica is coughing up $11.5B for E-Plus and is doing its best to get a larger share position in Telecom Italia, the company is obviously on the M&A path.
Whilst I do support the E-Plus deal, I don't fully agree with Telefonica's move to increase its stake in Telecom Italia, by paying a huge premium (69%) to the TI-share price. And as this TI-deal seems to be quite difficult to analyze, as TI is shedding off assets, I prefer to sell some shares at a 25% profit and wait for more clarity until dipping my toe back in.
Telefonica has re-confirmed its plans to pay a dividend, and the stock will go ex-div on Nov 6th. I know that if I sell some shares now, I won't get the dividend, but I'm fine with that because as a non-US or Spanish investor, Mr. Taxman takes more than 40% anyway.
I will sell 25% of my position and write call options on approximately 35-40% of my position. So if someone bought 800 shares at $13.43, his/her total investment would have been $10,750. I would now sell 200 shares at $16.79, thus taking $3350 off the table. I would also write some call options, and I'm particularly looking at the C17s for December this year, and the C18 March next year. The first one has a premium of $0.35, the latter a premium of $0.30. So if I would write two C17s Dec and one C18 March, I would pocket another $100, whilst receiving a gross dividend of approximately $285 in early November.
This strategy will allow me to still have a considerable long position to benefit from the E-Plus deal and the reinstated dividend.