* Telefonica scraps 2012 dividend; halves 2013 dividend
* Also scraps share buy-back programme
* Reduces compensation for management, board
* Company needs to cut 57-bln-euro debt pile, sell assets (Adds details, background, analysts)
By Julien Toyer and Clare Kane
MADRID, July 25 (Reuters) - Spanish telecoms giant Telefonica on Wednesday scrapped its dividend and share buy-back programme for 2012 and halved its shareholder payout for 2013 in a move to confront a 57-billion-euro debt pile and a deepening economic crisis in its home market.
The company, which reported its results a day ahead of schedule, posted a 34.4 percent fall in net profit for the first half of the year, to 2.1 billion euros ($2.55 billion), in line with analysts’ forecasts.
The moves to conserve cash come after ratings agencies have put pressure on the telecoms giant, with Standard & Poor’s downgrading its debt to BBB in May and Moody’s putting it on review for downgrade. Telefonica, which needs to raise 7 billion-8 billion euros a year through 2015 to cope with debt maturities, appears has realised that it cannot afford to lose its prized investment-grade rating as that would drive its borrowing costs even higher.
Telefonica said it would resume its dividend payments in 2013 at a rate of 0.75 euro per share, half its prior rate. It had said it would pay 1.5 euros per share in 2012.
The firm also cut by 20 percent the remuneration of its board members and cut by 30 percent the variable payouts for top management.
“This exceptional decision will neutralise for the company the liquidity conditions on debt markets, now presenting a debt repayment profile covered until the end of 2013, without taking into account the announced assets sales,” Executive Chairman Cesar Alierta said in a statement.
Spanish companies have been struggling to access funding on international markets for months and now are racing to cut massive debt piles accumulated during a decade-long boom fuelled by a property bubble and cheap credit.
Spain, the new frontline in the euro zone debt crisis, has seen its borrowing costs soar in recent weeks as its indebted regions, crippled banks and second recession in three years - set to last until 2013 - have unnerved investors.
Financial markets increasingly fear that Spain will be forced to seek a full-scale state bailout after accepting a 100 billion euro bailout for its financial sector, which doesn’t bode well for Telefonica, given that the company’s fortunes are closely tied to its home market.
Telefonica’s borrowing costs have risen along with those of the Spanish state. It said on Wednesday that its effective cost of debt rose to 5.8 percent in the past 12 months, compared with 5.22 percent at the end of 2011.
The financing pressure comes as Telefonica has suffered huge drops in mobile client numbers since it decided to use Spain as a dry run for a new business model that cuts subsidies for smartphones.
It has also lost ground in the market to competitors like Jazztel, which said on Wednesday it had seen a 27 percent increase in high-speed Internet (ADSL) clients and a 118 percent increase in mobile customers in the last year.
The firm is desperate to avoid a junk rating - a real possibility given that agency Moody’s rates Spain at the bottom of investment-grade and Telefonica only one notch higher, at Baa2.
Telefonica is not the only European telecom company cutting dividends in response to debt troubles. Since December, Telecom Italia, France Telecom and Telekom Austria have all cut payouts. Dutch telco KPN on Tuesday said it would more than halve its dividend.
Telefonica’s actions to cut its debt pile also included its decision in June to sell part of its stake in China Unicom for $1.1 billion.
The company, like many others in Spain, opted for a scrip dividend, which saw a take-up of over 60 percent.
Telefonica’s share price has fallen 34 percent since the beginning of the year to 8.7 euros, while Spain’s blue-chip IBEX index has dipped 30 percent and this week hit its lowest level since 2003.
“Without cutting the dividend for this year and scaling back the dividend for next year, they would have still been a hostage to market volatility,” said Paul Marsch, analyst at Berenberg Bank in London.
“They were a hostage to fortune before and now they’re taking a bit more control back into their own hands....If it enables them to get to their target gearing by end of the year they are no longer a pressured seller of assets,” he added.
Strained by high borrowing costs at an average of 5.8 percent over the past 12 months, Telefonica set out plans to list some of its overseas businesses to generate cash.
It is expected to shed call centre business Atento for around 700 million euros, according to media reports, after abandoning a plan to list the business last year.
It also indicated it could list its O2 Germany unit and some Latin American assets. A source told Reuters that Telefonica has now chosen banks for O2 Germany’s IPO.
The company’s exposure to international markets somewhat offsets the drag of its domestic market, where one in four is unemployed, but a slowdown in Latin America also threatens Telefonica, especially in Brazil.
The Brazilian local unit said on Wednesday profit dropped 5.6 percent in the quarter from the same period last year as higher expenses, a tumbling currency and subscriber delinquencies hampered growth.
Telefonica Czech Republic reported second-quarter net profit down 13 percent at 1.63 billion crowns ($77.17 million) on Wednesday. The profit beat the average estimate of 1.60 billion crowns in a Reuters poll of 13 analysts. ($1 = 0.8248 euros) (Editing by Leslie Adler)