CORRESP
Mr. Larry Spirgel
Mr. Michael Henderson
Mr. Terry French
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-0308
November 26, 2010
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Re: |
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Telefónica, S.A.
Form 20-F for the fiscal year ended December 31, 2009
Filed March 26, 2010
File No. 1-09531 |
Dear Messrs. Spirgel, Henderson and French:
Thank you for your letter dated October 21, 2010, setting forth comments of the staff of the
Division of Corporation Finance (the Staff) of the United States Securities and Exchange
Commission (the SEC or Commission) to the annual report on Form 20-F for the year ended
December 31, 2009 (the 2009 Form 20-F) of Telefónica, S.A. (Telefónica, also referred to in
this letter as the company and we), which was filed with the Commission on March 26, 2010.
We appreciate your understanding in affording us the time necessary to prepare our responses,
which we set forth in Annex A hereto. To facilitate the Staffs review, we have reproduced the
captions and numbered comments from the Staffs comment letter in boldface text.
We would like to express our appreciation for your cooperation in these matters, and we are
available to discuss any of our responses with you at your convenience. In that connection, please
do not hesitate to contact the undersigned in Madrid at 011-34-91-482-8502 or fax:
011-34-91-727-1407; or our counsel, Michael J. Willisch of Davis Polk & Wardwell LLP, at
011-34-91-768-9610 or fax: 011-34-91-768-9710.
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Very truly yours,
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/s/ Santiago Fernández Valbuena
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Santiago Fernández Valbuena |
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Chief Strategy Officer
Telefónica, S.A. |
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1
ANNEX A
Response to Comments Raised by the Staff
in the Letter Dated October 21, 2010
Form: 20-F for the year ended December 31, 2009
(2) Basis of Presentation of the Consolidated Financial Statements
c) Share exchange between Telefónica, S.A. and China Unicom Limited, and signing of strategic
alliance agreement, page F-10
1. |
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We note your response to comment one in our letter dated September 2, 2010. Please provide us
with the details of the contingent conditions that existed on September 6, 2009 that precluded
accounting for the agreement on that date and tell us how and when those contingencies were
satisfied or removed. |
As mentioned in our response to comment 1 of the Staffs letter dated September 2, 2010, the
completion of the share exchange transaction provided for in the Subscription Agreement dated
September 6, 2009 with China Unicom (the Subscription Agreement) was contingent on the
fulfilment of certain conditions by both parties. These conditions are described below.
The completion of the subscription by Telefónica of the 693,912,264 shares to be issued by
China Unicom was conditional on the following conditions being fulfilled or, if applicable,
waived by Telefónica:
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(i) |
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the listing of, and permission to deal in, all the new shares issued by China Unicom
having been granted by the Listing Committee of the Hong Kong Stock Exchange, and such
listing and permission not subsequently being revoked prior to completion; |
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(ii) |
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the warranties given by China Unicom in the Subscription Agreement being true and
accurate as at the date of the Subscription Agreement and remaining so as at the date of
completion; |
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(iii) |
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there not having been any material adverse change (as defined in the Subscription
Agreement) in respect of China Unicom or its group of companies, and China Unicom having
operated its business and the groups business in the ordinary course of business, since
the most recent published accounts of China Unicom; and |
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(iv) |
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all of the conditions to China Unicoms acquisition of shares in Telefónica under the
Subscription Agreement having been satisfied, or waived (other than the condition set out
in paragraph 3.1.1 of the Subscription Agreement) by China Unicom, as the case may be. |
At the same time, the conditions to China Unicoms acquisition of shares in Telefónica referred
to in paragraph (iv) above were the following:
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(i) |
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the Telefónica Board having passed a resolution either to increase Telefónicas
capital and to issue the necessary Telefónica shares (referred to as Alternative A in
the Subscription Agreement) or to contribute in kind the Telefónica shares to China
Unicom in exchange for the China Unicom shares (referred to as Alternative B in the
Subscription Agreement); |
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(ii) |
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the warranties given by Telefónica in the Subscription Agreement being true and
accurate as at the date of the Subscription Agreement and remaining so as at the date of
completion; |
A-1
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(iii) |
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there not having been any material adverse change (as defined in the
Subscription Agreement) in respect of Telefónica or the Telefónica Group, and Telefónica
having operated its business and the Telefónica Groups business in the ordinary course
of business, since the most recent published accounts of Telefónica; and |
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(iv) |
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all of the conditions to Telefónicas acquisition of shares in China Unicom
having been satisfied, or waived by Telefónica, as the case may be. |
According to the Subscription Agreement, if the conditions were not fulfilled or waived by the
relevant party, as the case may be, on or before November 7, 2009, the Subscription Agreement
would be automatically terminated. This time limit was subsequently amended to October 23,
2009.
These conditions were satisfied or removed as follows:
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(i) |
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The listing approval of the new shares to be issued by China Unicom was
granted to China Unicom on September 15, 2009. |
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(ii) |
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A written confirmation certifying that all China Unicoms warranties were
true and accurate in all respects was provided on the closing date. |
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(iii) |
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The condition relating to the absence of a material adverse change in
respect of both parties and the obligation to operate their respective businesses in
the ordinary course was removed on the closing date, as neither party alleged that
such an event had occurred. |
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(iv) |
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Telefónicas decision to elect Alternative B, that is, to contribute in kind
the Telefónica shares to China Unicom in exchange for the China Unicom shares was
communicated to China Unicom on September 24, 2009. This decision was subsequently
ratified by Telefónicas Board of Directors in the meeting held on September 30, 2009. |
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(v) |
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A written confirmation certifying that all of Telefónicas warranties were
true and accurate in all respects was provided at completion. |
On this basis, the closing of the transaction occurred on October 21, 2009.
2. |
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We note that the number of shares to be exchanged was fixed based on the USD. It continues to
be unclear whether or not the value exchanged was fixed since it appears to be subject to the
variability of foreign currencies as well as the China Unicoms stock price. Tell us how you
considered the impact of foreign currency rates and the China Unicom stock price in your
determination of how to account for this transaction under IAS 32 and IAS 39. |
As described above, we entered into the Subscription Agreement with China Unicom on September
6, 2009. Under the Agreement, Telefónica had the option of electing between increasing
Telefónicas capital and issuing 40,730,735 Telefónica shares (referred to as Alternative A
in the Subscription Agreement), or contributing in kind the 40,730,735 Telefónica shares to
China Unicom in exchange for the 693,912,264 China Unicom shares (referred to as Alternative
B in the Subscription Agreement). In both cases, the number of shares to be delivered by both
parties was fixed and was not subject to any changes after the signing of the Subscription
Agreement (other than for certain corporate transactions, such as stock splits). Telefónica
elected Alternative B and contributed the relevant Telefónica shares at the closing of the
transaction.
A-2
IAS 28, par. 20 states that the concepts underlying the procedures used in accounting
for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an
investment in an associate (emphasis added). In addition IAS 39 included as a scope exception in par. IAS 39,
par. 2(g) 1 any contract for the acquisition of a business at a future date. On the
basis of these cross references in the standards, we believe that a contract between an
acquirer and a vendor in an investment to be accounted for as an associate is also excluded
from the scope of IAS 39.
Although the number of shares to be exchanged was fixed, its corresponding value was subject to
the variability in China Unicoms and Telefónicas share prices, as well as changes in exchange
rates. However, since the transaction consisted of the purchase of a non-controlling interest
in an associated company through a share exchange, we did not account for this transaction
under IAS 32 and 39 and therefore we did not consider the impact of foreign currency rates
and/or variations in China Unicoms and Telefónicas share prices between the signing and
closing dates. The transaction was, however, contingent upon the fulfilment of certain
conditions, as described above in our response to comment 1. When these conditions were met and
the shares were exchanged, we recognised this transaction as an investment in an associate,
under IAS 28.
Prior to this transaction, Telefónica held a 5.38% ownership interest in China Unicom, which
was considered as an available for sale financial asset. After this transaction, our investment
in China Unicom was considered as an investment in an associate. Therefore we applied IAS 28
Investments in Associates to this acquisition and, accordingly, the investment was initially
measured at cost. However there is no indication in the standard as to what is meant by cost
in this context. Given this, we then considered IAS 8, which requires that in the absence of
specific guidance an issuer should refer to the requirements and guidance in other IFRS dealing
with similar and related issues. IAS 28 (the version effective for fiscal year 2009) includes
an explicit reference to IFRS 3. Given this, we considered that the requirements of IFRS 3
would be the most appropriate point of reference in determining the cost.
Accordingly, the cost was determined as the aggregate fair value at the date of exchange of the
assets given, liabilities incurred or assumed and equity instruments issued by the acquirer
plus any costs directly attributable to the transaction. In practice, the cost of the China
Unicom shares was determined as the exchange-date fair value of the equity instruments
delivered (the Telefónica shares) plus any related transaction costs.
The company believes that this accounting treatment complies with IFRSs, which has been
reviewed with our accounting firm.
We supplementally advise the Staff that had we considered that this transaction involved a
derivative instrument from the date of the Subscription Agreement, and taking into
consideration Telefónicas election, we estimate that the amounts involved would have been the
following:
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At September 6, 2009, a derivative liability would have amounted to
35 million. |
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At September 30, 2009 the derivative liability would have amounted to
96 million. |
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At October 21, 2009 the derivative liability would have amounted to
109 million. |
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contracts between an acquirer and a vendor in a
business combination to buy or sell an acquiree at a future date. |
A-3