A Latin American Lifeline For Spanish Teleco

| About: Telefonica S.A. (TEF)

Austerity has already pushed Spain into a recession and is now putting pressure on the country’s biggest stocks. But while Latin America has a much more vibrant economic environment, some are worrying that Telefonica (NYSE:TEF) could face political trouble there.

TLAB denies putting little people into its access switches.

Friday’s numbers from TEF were anything but great, and the shares plunged 3.5% as investors dumped their disappointment ahead of what many fear will be worse performance ahead.

An 11% decline in revenue from Spain is steep by telecom standards, but in combination with a broader 6.6% decrease in subscriber fees from nearby markets — including Portugal and Italy — conditions in Europe look pretty bad.

Emerging markets traders, of course, know that TEF is really about Brazil, Argentina, and its other operations in Latin America. This side of the Telefonica empire accounts for close to 50% of the company’s overall revenue and has historically grown faster than the relatively mature Spanish business.

That growth came through for TEF last quarter. At this rate, Latin America will probably account for more than half of the company next quarter if it doesn’t already.

Here, the issue is how TEF can grow in Brazil, where the number of active cell phone accounts currently outnumbers the human population by over 20%.

TEF already has 74 million mobile accounts in its market-leading Vivo network and another 16 million fixed line subscribers in Brazil, or about 40% of the population.

While it expanded its overall network penetration by 16% — nearly 13 million people — over the last year, it’s just not clear how long it can keep signing accounts at a rate of about 1 million a month before running out of customers.

Look for global competitors like Tim Participaes (NYSE:TSU) and America Movil SA (NYSE:AMX) — and maybe even local underdog TNE (quote) — to fight aggressively to keep their share in the meantime.

One ray of sunshine: while there’s been a lot of talk over whether Argentina may nationalize TEF’s local holdings, the company does not expect to meet the same fate as Spanish oil company Repsol (OTCQX:REPYY), which recently lost its Argentine subsidiary YPF Sociedad Annima (NYSE:YPF).

Even if it does, it turns out that Argentina only accounts for 5% of TEF’s global revenue. Compared to a bad quarter or two in Europe if the recession deepens, that may look less like disaster than collateral damage.