Yearsof debt-fueled expansion mean pressure is mounting on 's Telefónicato address its estimated €52.6 billion debtpile. The company is leaning toward an IPO or sale of its O2 unit in the U.K.

Afterthe EU Commission quashed theproposed $14.9 billion sale of its O2 U.K. unit toHong Kong's Hutchison Whampoa in May this year, the failed IPO, mainly due to weakinvestor demand, is the latest blow for the Spanish operator.

Thefailure to successfully close both exits leaves Telefónicawithshrinking options to trim its debt load and maintain dividends, all the whileavoiding a downgrade of its credit rating.

Moody's recently said the Spanish operator would require"significant investment" to compete in the U.K. market and that asale of O2 will be essential for improving the company's leverage. In astatement, the rating agency said it expects €15 billion total debtreduction through 2017.

A long-running parody of Spain's economic boom and suddenturn in fortune, Telefónica has its work cut out in reducing its debt.

When the operator acquired BellSouth's Latin American mobileoperations for just over $4.1 billion in 2004, it had one of the strongest balance sheets of any telecom operator in Europe and economicgrowth in Spain was twice the European average. It then paid a 20% premium forO2 in a deal valued at $31.4 billion in 2006.

That the Spanish economy is now back on its feet will offerlittle consolation to Telefónica, which has already sold noncore assets in , China, theCzech Republic and Ireland tofocus on core markets like Germany andBrazil.

Last month, the group confirmed it is weighing a listing orsale of O2.

However, Javier Mielgo, a Madrid-based telecoms analyst atMirabaud, believes the clock is ticking for such a deal.

The asset is likely to be valued at £9.25 billion, which isaround a billion pounds less than HutchisonWhampoa's offer, Mielgo said in an interview, adding that the longer Telefónica waits, the harder it will be to agree on adesirable price.

Market dynamics in the U.K., where O2 is a major mobile-onlyplayer in a market moving toward multiplay services, could prove to be anotherroad bump in Telefónica's plans.

In particular, the £12.5 billion BT-EE combination, a strongbet on the quadplay phenomenon sweeping across Europe, means operators willincreasingly compete on a multiplay basis as thefixed, mobile and TV markets become increasingly interdependent.

As such, Declan Lonergan, a Dublin-based analyst at 451Research, believes there is still a major question mark over O2's strategicrole in the British mobile market.

"It is almost inevitable that O2 will have to undergo anacquisition or merger to offset strong competition," Lonergan said in aninterview.

Within the British Isles and beyond, Telefónica also faces a test in its ability to navigate theterrains of increasingly uncertain financial markets.

Thedepreciation of the pound sterling against the euro, post-Brexit, will have animpact on any potential IPO as fears of a "hard exit" grow, accordingto London-based analyst Imran Choudhary at market research firm GfK.

Atthe same time, should someone adopt an extremely disruptive pricingarchitecture in the UK, or should O2's position change, the value of the brandcould generate Telefónica significantly less cash, Choudhary added.

"Timingof the IPO will be everything," he concluded.