The End of a Reign in Spain?

SAN FRANCISCO (07/25/2000) - Juan Villalonga's aggressive dealmaking as chairman of Spain's Telefonica SA transformed it into an international powerhouse. But disaffected shareholders are stepping up pressure on him to do his wheeling and dealing elsewhere.

Major shareholders and a number of board members are said to be displeased with the way the flamboyant Villalonga runs the telecommunications and Internet company. They are upset that he does not consult them on major decisions.

While a Telefonica spokesman denies that Villalonga is on his way out, a senior executive at the company says privately that the chairman's resignation is simply a matter of time, and that it could happen after the July 26 board meeting.

Spanish Prime Minister Jose Maria Aznar, a childhood friend of Villalonga's, appointed him to head Telefonica when the former state-owned telco was privatized in 1996. Villalonga quickly expanded abroad, making the company the dominant telco in Latin America. He also acquired many radio, TV and cable concerns in Europe and the Americas. Villalonga's crowning achievement was a US$12.5 billion deal announced in June for Telefonica's Internet arm, Terra Networks SA, to acquire the U.S. portal Lycos Inc. The deal, which has not been finalized, gives Villalonga entry into the flashy realm of Internet portals.

But Villalonga's brash personality and bold tactics have put him on a collision course with his old friend Aznar. While the government owns only 3 percent of Telefonica's equity, it retains veto power over major deals. That authority was exercised in May when the government blocked Villalonga's plan to merge with Dutch telco KPN, on the grounds that the Dutch government would have ended up owning 17 percent of Spain's main telephone company.

"That deal would have taken Telefonica to a completely different level, and it fell through largely because of strained relations between Villalonga and the government," says the Telefonica executive, who requested anonymity.

Villalonga has since become increasingly embroiled in controversy. In June, Spain's government-friendly El Mundo newspaper published allegations that in 1998 Villalonga made about $150,000 from insider trading of Telefonica stock.

It was enough to stoke the opposition; Spanish authorities are investigating the claim.

"The people who are interested in seeing him go are fueling this investigation," says Jordi Vilanova, executive adviser at investment house Granville Baird in Madrid.

According to press reports in Spain, if Villalonga agrees to exit Telefonica quietly, the investigation would likely be moved to the back burner and eventually dropped.

It's also speculated that Villalonga will end up as an executive at a large U.S. technology company. Other theories suggest he might end up heading Terra Lycos or negotiate a face-saving deal that would let him remain chairman of Telefonica while the company is actually run by a new, lower-profile CEO. It's rumored that a potential replacement is Cesar Alierta, chairman of Franco-Spanish tobacco group Altadis. He is said to be well regarded by international investors and is seen as more predictable than Villalonga.

Telefonica stock has sagged since it peaked in March, but over the long run shareholders have profited handsomely from Villalonga's expansive strategy. "It is quite obvious that Villalonga has added tremendous value to Telefonica and all of its properties," says Vilanova. The company's market value has gone from around $20 billion to $70 billion during his tenure.

But with Villalonga coming under siege in recent weeks, a cloud has formed over the company as it prepares for the IPO of its wireless division and tries to push ahead with its acquisition of Lycos. Both Terra and Lycos say their deal will go ahead as planned, but analysts say that is questionable. "There is certainly now a major element of uncertainty hovering over the merger," says Lars Schonander, an Internet analyst at ING Barings. After all, Villalonga made the deal happen, and it could easily come undone if he goes.

Villalonga's departure would be a mixed blessing for Telefonica. "Villalonga going takes uncertainty out of the market - and that's good," says Bruce Stanforth, analyst at BNP Paribas in New York. "But losing a brilliant executive - or the risk that the Terra Lycos deal will fail - is not good."

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