UPDATE 2-Telefonica Deutschland hit by wireless slowdown

Tue Nov 6, 2012 2:05pm GMT

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* Q3 wireless revenue growth 5.6 pct vs 8.6 pct in Q2

* Q3 core operating margin 27.2 pct from 24.8 pct

* Shares down 1.9 pct, underperforming main market (Adds detail, background, analyst comment, shares)

By Harro Ten Wolde

FRANKFURT, Nov 6 (Reuters) - A faltering German economy has slowed revenue growth at Telefonica Deutschland's main wireless business, weighing on its shares a week after their stock market debut.

The firm, which remains majority-owned by Telefonica after the Spanish group listed a 23 percent stake, said on Tuesday revenues for its wireless services rose 5.6 percent in the third quarter, down from 8.6 percent in the second.

That was still better than its closest peer in the German market, KPN, which last month reported flat sales.

But Telefonica Deutschland's shares were down 1.9 percent at 5.825 euros by 1330 GMT, underperforming a 0.8 percent rise on the STOXX Europe 600 telecoms index, though remaining above their initial public offering (IPO) price of 5.6 euros.

"The market reaction suggests that some hopes had been raised unreasonably high in the IPO process," Bernstein Research analyst Robin Bienenstock said.

The German mobile market is feeling the impact of the euro zone financial crisis after growth of Europe's biggest economy slowed to 0.3 percent in the second quarter.

Telefonica Deutschland, which operates under the O2 brand, is the smallest of four operators in Germany, after Vodafone , Deutsche Telekom and KPN's E-Plus.

Its listing last week raised 1.45 billion euros for Telefonica to trim its debt.

Investors were drawn to the stock for its dividend and the fact the German wireless market is considered one of the more attractive markets in Europe due to a stronger economy.

Also, Germans spend less on mobile phone calls and wireless internet than other Europeans, which could give telecom operators scope to increase revenues through higher data use.

FULLY PRICED

Telefonica Deutschland shares trade at just below 5.7 times earnings before interest, taxes, depreciation and amortisation (EBITDA).

That is above the multiple of 3.5 at Deutsche Telekom which is due to publish quarterly results on Thursday, and KPN's 4.2, but below France Telecom's 7.4.

"It is a good stock and fully priced," said Erling Thune, a fund manager at DNB Asset Management who does not own Telefonica Deutschland shares and has no plans to add the stock to his portfolio. "Maybe in the future when market noise will lead to downward corrections."

Telefonica Deutschland shares have so far not dropped below their IPO price, nor the 5.7 euro level at which they started trading.

The firm's market capitalisation is now around 6.6 billion euros, just below KPN's 6.8 billion.

KPN, which is 27.5 percent owned by Mexican operator America Movil, and Telefonica in the past discussed combining their German operations but could not reach an agreement.

Tough competition is forcing players in the German mobile market such as KPN to offer better deals to win clients, putting pressure on margins.

But Telefonica Deutschland's core operating margin widened to 27.2 percent in the third quarter from 24.8 percent.

It had 25.3 million connections at the end of September, 4.1 percent more than a year earlier.

($1 = 0.7823 euro) (Additional reporting by Leila Abboud in Paris; Editing by Mark Potter)

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