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Telecom Italia Owners Said to Discuss Telco Capital Increase

Telecom Italia SpA (TIT)’s largest shareholders plan to meet this week to discuss a capital increase for Telco SpA, the group of investors that own about 22 percent of the country’s former phone monopoly, people with knowledge of the situation said.

Officials at Assicurazioni Generali SpA (G), Mediobanca SpA (MB), Intesa Sanpaolo SpA (ISP) and Telefonica SA (TEF) are set to gather on May 3 to discuss the proposal, and the size of the recapitalization will depend on the loans that Telecom Italia’s holding company needs to refinance in the coming months, said the people, asking not to be identified because the talks are private.

Telco investors agreed in February to renew their shareholding agreement by three years through February 2015. They wrote down the value of their Telecom Italia stake last year, with the three banks now valuing the stock at 1.50 euros. Milan-based Telecom Italia has been trading at less than that level since 2008.

“I don’t see any clear rationale why they would increase the amount of inter-company debt unless external lenders are looking less likely to refinance, which might be the case,” said Paul Marsch, an analyst at Berenberg Bank in London. “Telefonica’s balance sheet needs improvement, they don’t need to be injecting more money into assets like Telco.”

Bank Loans

Representatives at Assicurazioni Generali, Mediobanca, Intesa Sanpaolo and Telefonica declined to comment. Il Sole 24 reported the scheduled meeting of the Telco shareholders yesterday.

Telecom Italia fell 1.3 percent to 85.9 cents at the close of trading in Milan, valuing the company at 15.8 billion euros ($21 billion). Telefonica, Spain’s largest phone company, dropped 2.7 percent to 11.01 euros on the Madrid exchange. It has a market value of 50.2 billion euros.

Telco has more than 2 billion euros of bank loans expiring this year, of which 1.3 billion euros are due in May. The shareholders have also subscribed to 1.3 billion euros in bonds expiring this year that can be extended to 2013. Telefonica holds about 600 million euros of Telco debt, Marsch said.

Selling new bonds is another option the Telco shareholders may consider, said one of the people.

Telecom Italia last month posted a 4.73 billion-euro net loss for 2011 because of a goodwill writedown and as the European debt crisis sapped demand from consumers in its home market. The company, alongside other operators including Vodafone Group Plc (VOD), has struggled in the Italian market as the new government implements spending cuts and tax increases.

Dividend Payout

In February, Telecom Italia cut its dividend payout for 2011 to lower debt to 27.5 billion euros and retain its credit rating. Executive Chairman Franco Bernabe said April 4 that a spin-off of the company’s fixed-line network was one of several studies being considered to help raise cash.

Telefonica is also searching for ways to safeguard its shareholder payout after it reduced its 2012 dividend forecast by 14 percent in December, abandoning a policy set up two years ago, because of “significantly” changed market conditions. It was its first dividend cut in a decade, highlighting the extent to which Spain’s high unemployment has hit the company.

“It’s not obvious that the stake in Telecom Italia is that essential,” said Jean-Michel Salvador, an analyst at AlphaValue in Paris. “I think Telefonica should sell its stake -- not today, but in the future.”

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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