Telefónica CEO César Alierta to Step Down

MADRID— Telefónica SA Chairman and Chief Executive César Alierta is stepping down, capping nearly 16 years at the helm of the Spanish telecommunications giant where he oversaw a period of expansion followed by a more recent retrenchment as the firm grapples with a hefty debt load.

Mr. Alierta, 70 years old, is proposing Chief Operating Officer José María Álvarez-Pallete to succeed him, the company said in a statement on Tuesday. Telefónica’s board will vote on Mr. Álvarez-Pallete’s appointment at an April 8 meeting.

While analysts and investors say they had anticipated Mr. Alierta would step down, Tuesday’s announcement came sooner than some had expected. Telefónica didn’t provide any details on the timing of his exit. Mr. Alierta will remain on the board and continue to run the company’s foundation.

Mr. Alierta’s naming of Mr. Álvarez-Pallete, on the other hand, was no surprise to analysts and investors, who said Mr. Alierta had been grooming the 52-year-old for the top job.

Mr. Álvarez-Pallete joined the telecommunications company in 1999 and has been its operating chief since 2012. Investors and analysts say he has held more meetings with them during the past couple of years than Mr. Alierta, as the chairman appeared to cede more decision-making power to his No. 2.

Analysts said they don’t expect a shift in strategy under Mr. Álvarez-Pallete. They say that he has already been playing an important role in crafting the company’s focus on bulking up where it is a big player—Spain, Germany and Brazil—and exiting markets where it lacked scale or product offering, such as Ireland and the Czech Republic.

Mr. Álvarez-Pallete “is considered to be a very safe pair of hands for Telefónica and is widely respected by the financial markets,” said Berenberg Bank analyst Paul Marsch.

On Tuesday, shares of Telefónica rose 1.5% to €9.86 ($11.04) in Madrid following the company’s announcement.

Mr. Alierta took over as chairman in 2000 and oversaw the expansion of Telefónica, buying BellSouth Corp.’s Latin American wireless operations in 2004 and British cellphone operator O2 PLC in 2005. The acquisitions took place amid a broader optimism in Spanish boardrooms, buoyed by a property boom that was driving the country’s economic growth.

Telefónica’s cellphone towers and underground phone networks now span most of Latin America and major European economies.

But Spain’s property boom collapsed in 2008 and the country sank into recession. Mr. Alierta and other Telefónica executives “were living in denial when the macro turned against them,” said Georgios Ierodiaconou, a telecommunications analyst at Citi. “They kept on increasing the dividend every year to levels that were very hard to sustain.” To deliver on the promised payouts, Mr. Ierodiaconou said, Telefónica had to curtail investment in its businesses around the world and lost customers in Latin America and other markets. Debt also rose.

Mr. Alierta eventually shifted focus, with Mr. Álvarez-Pallete as his deputy.

“In the last few years, the company has tried to keep debt at bay by reducing its footprint and selling assets in those countries where growth opportunities were elusive and focusing on four or five countries that offer upside or opportunities,” such as Spain, Germany and Brazil, said Javier Borrachero, a telecommunications analyst at Kepler Cheuvreux. The company, however, remains “highly leveraged,” Mr. Borrachero added.

In 2013, Telefónica bought German mobile operator E-Plus to expand its presence in that country, and in 2015, the company agreed to sell its O2 U.K. unit to rival CK Hutchison Holdings Ltd.

The company is aiming to seal the deal with CK Hutchison in the second quarter, but analysts have expressed concern that Europe’s top antitrust regulator might set stringent conditions on the sale, effectively making it less profitable for Telefónica. Mr. Alierta has said he is “very confident” regulators would approve the O2 deal.

A successful sale will be an important building block in Mr. Alierta’s legacy of hunkering down in profitable markets and exiting unprofitable ones.

“Now, Telefónica is doing the right thing,” said Mr. Ierodiaconou, the Citi analyst. But, he said, “a lot of what they have changed, we haven’t had time to see the effect.”

“I think [Mr. Alierta’s] legacy will be determined in the next two to three years,” Mr. Ierodiaconou said.

Write to Jeannette Neumann at jeannette.neumann@wsj.com