Correspondence
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
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January 21, 2011 |
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 December 22, 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.
Very truly yours,
/s/ Santiago Fernández Valbuena
Santiago Fernández Valbuena
Chief Strategy Officer
Telefónica, S.A.
Registro Mercantil Provincia de Madrid, Tomo 12.534, Folio 21, Hoja M-6164, Inscripción 1359a, del Libro de Sociedades, CIF A-28/015865. Sede Social: Gran Vía 28, 28013 Madrid (España).
1
ANNEX A
Response to Comments Raised by the Staff
in the Letter Dated December 22, 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
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We have carefully considered your response to prior comments one and two provided in your
letter dated November 26, 2010. We also reviewed the terms and conditions set forth in your
Subscription Agreement with China Unicom Limited that was signed on September 6, 2009
(Subscription Agreement). We do not agree with your conclusion that the nature of those
terms and conditions resulted in the Subscription Agreement not being binding until they were
all satisfied. It appears that the Subscription Agreement was a binding contract at the date
it was signed, September 6, 2009, and should have been recorded at that time. |
We note that you concluded that the Subscription Agreement was not within the scope of IAS 32
or IAS 39 based on your interpretation of paragraph 2(g) of IAS 39, which applies to any
forward contract between an acquirer and a selling shareholder to buy or sell an acquiree that
will result in a business combination at a future acquisition date. You indicated in your
response to prior comment two that after this transaction, [your] investment in China Unicom
was considered as an investment in an associate. It is not appropriate to apply paragraph 2(g)
of IAS 39 to investments in associates by analogy. Refer to paragraph BC24D of IAS 39. As such,
we do not agree with your conclusion that the Subscription Agreement is not within the scope of
IAS 32 or IAS 39.
It appears that the Subscription Agreement should have been accounted for on the date it was
signed, September 6, 2009, and accounted for in accordance with paragraph A35(c) of IAS 39.
We have carefully considered your comments reproduced above and have thoroughly reassessed the
accounting treatment applied to the share exchange transaction agreed between Telefónica and
China Unicom in 2009. After such reassessment, we continue to believe that the accounting
treatment applied by us was appropriate. Nevertheless, considering the situation in 2009 where
IAS 39 was subject to certain amendments that became effective after the 2009 year-end, we
acknowledge that other treatments could have been taken into consideration.
While we continue to believe that the accounting treatment applied by us was appropriate, we
acknowledge the Staffs interpretation of the appropriate accounting treatment for the
transaction and the possibility of treating the transaction as a derivative instrument.
We supplementally advise that had we considered that this transaction involved a derivative
instrument from the date of the Subscription Agreement, any resulting difference in our
consolidated financial statements would have been immaterial. We estimate that the potential
financial instrument would have had an estimated fair value of 109.03 million at October 21,
2009, as calculated as discussed in our response to comment two, which would have represented a
negative impact of approximately 1.05% on profit before tax from continuing operations for
2009. On an after tax basis, the effect of the derivative would have amounted to 76.3 million,
representing a 0.98% negative impact on profit for the year attributable to equity holders of
the parent. The financial
instrument would have also been immaterial to our statement of financial position at December
31, 2009 and our cash flow statement for 2009. We have also considered the guidance in Staff
Accounting Bulletin No. 99 with respect to qualitative factors and have concluded such impact
would be immaterial.
A-1
The alternative accounting interpretation would not result in any of the following:
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Change in earnings trends or other trends |
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Failure to meet analysts expectations |
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Change from income to loss |
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Impact segments information or other trends |
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Effect in regulatory requirements |
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Effect in loan covenants or other contractual requirements |
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Effect on managements compensation |
In sum, while we continue to believe the accounting treatment applied by us was appropriate at
the time it was considered, we have analysed the impact of treating the transaction as
involving a derivative instrument would have had on us and have concluded that any such impact
would have been immaterial.
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Please provide us with the calculations and assumptions used to determine your estimate of
the derivative liability amount at October 21, 2009 which you provided in your response to
prior comment two. |
In respect of the calculations and assumptions used to determine our estimation of the
derivative liability at October 21, 2009, we have estimated the value of the derivative as the
difference between the market value of the Telefónica shares and the market value of the China
Unicom shares at the exchange transaction date, both amounts stated in euros.
As the closing took place during Hong Kong business hours, we have considered the closing stock
prices and exchange rates of the day preceding the closing of the transaction, i.e. October 20,
2009, as the best approximation of the market values of the two companies at the exchange
transaction date.
The details of the calculations are the following:
A-2
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a) |
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Market value of the Telefónica shares: |
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I. Number of shares |
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40,730,735 |
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II. Stock price as of October 20, 2009 (1) |
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18.95 |
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III. Market value (I*II) |
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771,847,428.25 |
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(1) |
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Source: Bloomberg closing price of Telefónica shares on the Spanish stock exchange
(TEF SM) as of October 20, 2009. |
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Market value of the China Unicom shares: |
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IV. Number of shares |
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693,912,264 |
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V. Stock price as of October 20, 2009 (2) |
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11.06 HKD |
VI. Exchange rate as of October 20, 2009 (3) |
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11.5824 HKD/ |
VII. Market value (IV*V/VI) |
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662,614,798.30 |
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(2) |
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Source: Bloomberg closing price of China Unicom shares on the Honk Kong stock
exchange (762 HK) as of October 20, 2009. |
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(3) |
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Source: Bloomberg closing value of the EUR-HKD exchange rate (HDEU) as of October 20,
2009. |
The difference between both market values has been considered as the estimation of the fair value
of the derivative as of October 21, 2009.
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VIII: Derivative (VII-III) |
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(109,028,983.23) |
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The after tax impact of this derivative would have amounted to (76,320,288.26) , representing
0.98% of our profit for the year attributable to equity holders of the parent of 7,776 million in
year 2009.
The profit figures of Telefónica for the last three years were the following:
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Millions of euros |
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2009 |
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2008 |
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2007 |
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Profit before tax from continuing operations |
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10,387 |
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10,915 |
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10,684 |
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Profit for the year |
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7,937 |
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7,826 |
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9,119 |
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Profit for the year attributable to equity
holders of the parent |
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7,776 |
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7,592 |
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8,906 |
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A-3