We are downgrading our recommendation to Underperform for Telefonica S.A. (TEF) due to its conflict with Portugal Telecom for the full control of their Brazilian wireless joint venture.
Despite solid results, Telefonica remains challenged by a weak Spanish economy which is contributing to sustained erosion in the domestic wireline voice business. Additionally, reduced tariff rates imposed by Spanish and European regulations are tightening wireless revenue per user.
We also remain cautious with regard to the carrier’s aggressive acquisition strategy, increasing competitive exposure and a highly leveraged balance sheet. Accordingly, we lower our price target to $53 per share, based on 8.4x our 2010 EPADS estimate.