Telecom Italia SpA directors took little time to turn down a 2 billion-euro ($2.6 billion) offer five months ago by Egyptian billionaire Naguib Sawiris to buy a stake in the phone company. As another tycoon approaches, the board will find it’s in a weaker position to bargain this time.
At a meeting in Milan today, Telecom Italia’s board designated Chief Executive Officer Franco Bernabe (BNBC) to lead a panel to explore the feasibility of a combination of its mobile- phone business with H3G, the Italian unit of Li Ka-shing’s Hutchison Whampoa Ltd. (13), a person familiar with the decision said, declining to be identified because the discussions were private.
Telecom Italia shares are trading near a 15-year low -- and about 16 percent off the mid-November level -- while its net debt adjusted for some items reached 28.3 billion euros at the end of 2012, missing the company’s target and amounting to 2 1/2 times the carrier’s market capitalization.
A deal would combine Italy’s biggest wireless carrier with the No. 4, run by Hutchison. Based on H3G’s reported earnings and multiples of publicly traded European carriers compiled by Bloomberg, the unit could be valued at about 1.5 billion euros without a premium. For Hong Kong-based Hutchison, Telecom Italia’s high debt is a concern, a person familiar with the matter has said.
“There’s certainly a rationale for Hutchison to pay a control premium,” said James Britton, a London-based analyst at Nomura Holdings Inc. in London. “However, I still struggle to believe this will get done unless the government paves the way for Hutchison to get involved and the political mandate is far from clear in today’s Italy.”
Italy has faced political gridlock since elections in February failed to produce a clear winner. The Democratic Party led by Pier Luigi Bersani fell short of winning both houses of Parliament in the elections and he was unsuccessful in his first attempt to form a government.
There’s little chance of progress in forming a government before a new president is elected to replace Giorgio Napolitano, whose seven-year term ends in mid-May.
Telecom Italia -- the country’s former phone monopoly that’s considered a strategic asset -- is about 22.4 percent owned by Telco SpA, whose investors include Telefonica SA (TEF), Intesa Sanpaolo SpA (ISP), Assicurazioni Generali SpA (G) and Mediobanca SpA. (MB) The new panel also includes Telefonica’s Julio Linares, Elio Cosimo Catania from Intesa and Gabriele Galateri from Generali.
A potential transaction has been delayed in the past by Hutchison’s “pride” and Telecom Italia’s concern over whether it could recover tax losses at H3G, James McKenzie, a Madrid- based analyst at Fidentiis Equities SA, wrote in a report yesterday. Hutchison won’t “admit that the aggressive market entry has been a disaster,” he wrote, and the tax losses could reach 9 billion euros.
An “upside could come if Telecom Italia is in a position to reclaim tax losses,” he wrote. A deal “would probably result in a capital increase at Telecom Italia level which we would view very favorable, since the principle issue of the company is currently the level of debt.”
On also the agenda of today’s board meeting is a proposed spinoff of Milan-based Telecom Italia’s fixed-line network, another person said yesterday. The network is valued at 13 billion euros to 15 billion euros, according to Telecom Italia’s second-largest shareholder Findim Group.
Italian state lender Cassa Depositi e Prestiti SpA may acquire a stake in the network, a person familiar with the matter said in December.
Open Access, a Telecom Italia unit created in 2008 to manage the grid and offer access to competitors, may be put into a separate entity to pave the way for the carve-out, that person said.
Telecom Italia said last week it’s examining a possible merger with H3G. Such a combination would eliminate a competitor offering the cheapest wireless services and create an operator with about 45 percent of Italy’s wireless subscribers, based on data compiled by communications regulator Agcom for the third- quarter of 2012.
“In the case that an integration process is approved, we gather the transaction could face regulatory headwinds” over the market share and the reduction in number of operators, said Borja Mijangos, a Madrid-based analyst at Interdin Bolsa.
Telecom Italia is selling assets and cutting jobs as it looks for ways to reduce debt and raise money for investments. Its board on Dec. 6 rejected Sawiris’s offer about an investment in new Telecom Italia shares for at least 2 billion euros, a plan that would dilute Telco’s interest.
Telco has already written down the value of its stake in Telecom Italia to 1.20 euros a share. Still that’s almost twice where the shares are trading in Milan. Today they rose 1.7 percent to 61.3 cents at 5:28 p.m.
They fell to 53.6 cents on April 3, the lowest price since August 1997. They have gained 12 percent since Bloomberg News reported last week the agenda for today’s board meeting.
Hutchison shares added 0.2 percent to close at HK$82.15 in Hong Kong.
Hutchison “confirms there have been preliminary exploratory contacts between Telecom Italia SpA (TIT) and 3 Italia SpA as to possible business combinations between them,” it reiterated in an April 9 statement.
Last month, Telecom Italia reported a 2012 loss after taking a bigger-than-expected goodwill writedown of more than 4 billion euros. It also reiterated its forecast for 2013 earnings before interest, taxes, depreciation and amortization to drop by a low-single-digit percentage, excluding some items, and for revenue on that basis to be stable.