Telecom Italia to Start Detailed Review of Hutchison Linkup

Telecom Italia SpA (TIT) directors authorized an “in-depth” review on a possible combination of its mobile-phone business with Hutchison Whampoa Ltd. (13)’s Italian unit.

A panel led by Chief Executive Officer Franco Bernabe to explore a possible linkup with the Hong Kong company’s 3 Italia “acknowledged that there are no impediments to start a discussion,” the company said in a statement yesterday. The panel asked top management to verify “the existence of realistic negotiation margins” over the value of the two companies, recommending a conclusion of the analysis by 30 days.

Bernabe is betting on an alliance with Hong Kong billionaire Li Ka-shing’s Hutchison to revive a stock that hit a 15-year low last month. Some members of the panel are skeptical about a deal because of differences in valuation for 3 Italia, while leading shareholder Telefonica SA (TEF) is concerned about potential losses in a transaction, people familiar with the matter have said.

Reaching an agreement with Hutchison will be “complex” because of regulatory obstacles that must be overcome, Bernabe said on a conference call today with analysts. A merger would combine Italy’s biggest wireless carrier with the No. 4, giving them about 45 percent of the country’s mobile market.

A logo sits on the window of a 3 Italia mobile phone store in Rome. Photographer Alessia Pierdomenico/Bloomberg Close

A logo sits on the window of a 3 Italia mobile phone store in Rome. Photographer... Read More

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A logo sits on the window of a 3 Italia mobile phone store in Rome. Photographer Alessia Pierdomenico/Bloomberg

The Milan-based company’s board requested an examination of the financial results at 3 Italia, said a person briefed on the matter, asking not to be identified because the deliberations are private.

Italy’s largest phone company yesterday reported first-quarter earnings that missed analysts’ estimates as revenue in its home country plunged 10 percent.

Operating Income

Operating income before taxes, depreciation and amortization fell 10 percent to 2.67 billion euros ($3.52 billion). Analysts had projected Ebitda of 2.73 billion euros, according to the average of estimates compiled by Bloomberg.

The shares rose 2 percent to 64.9 euro cents in Milan, giving the company a market value of 11.9 billion euros.

Telecom Italia is 22.4 percent owned by Telco SpA, whose investors include Telefonica, Assicurazioni Generali SpA (G), Intesa Sanpaolo SpA (ISP) and investment bank Mediobanca SpA. (MB) The shareholders have written down the value of their stakes several times and have considered using Hutchison’s possible entry as a new shareholder to facilitate their exit, people familiar with the matter have said.

Complicating the discussion is the valuation of 3 Italia. While the division has a so-called fair value of 1.5 billion euros, the actual figure could differ widely because of accumulated losses amounting to as much as 8 billion euros and the lack of clarity of how much of that can be used to offset taxes, a person familiar with the matter said.

Leading Shareholder

3 Italia had 2012 revenue of about 1.5 billion euros and earnings before interest, taxes, depreciation and amortization of about 90 million euros, another person said, adding that the numbers were restated to meet Italian accounting rules.

Telecom Italia said April 11 that Hutchison wants to become a leading shareholder in the Italian carrier in any deal.

Representatives for Generali, Intesa Sanpaolo and Mediobanca declined to comment. Telefonica Chief Financial Officer Angel Vila said yesterday the Spanish company is “happy” with its position in Telco and is “supportive” of actions to boost the value of the holding vehicle.

Telco’s partners, which agreed in February 2012 to renew their shareholding agreement for three years with an exit option in September 2013 and August 2014, may use the first window in September to revoke the accord, according to a person with knowledge of the matter.

‘Exploratory Nature’

Generali CEO Mario Greco, who is reviewing the insurer’s strategy, has repeatedly said the company should focus on its core business. Mediobanca CEO Alberto Nagel has said he wants to cut the bank’s equity investments as part of a business plan to be unveiled in June.

Hutchison reiterated yesterday that “contacts between Telecom Italia and 3 Italia on possible business combinations are still very preliminary and of an exploratory nature.”

For Hutchison, Asia’s biggest investor in European wireless networks, Telecom Italia’s high net debt -- which reached 28.8 billion euros at the end of March, adjusted for some items -- is a concern, a person familiar with the matter has said.

The company said yesterday that its debt is sustainable and any assessment of the possible impact of the integration with 3 Italia and the proposed network spinoff is “premature.”

Telecom Italia shares sank as low as 54 cents last month, the lowest level since August 1997.

Fixed-Line Spinoff

Other panel members evaluating the possible linkup with Hutchison are Telefonica’s Julio Linares, Elio Cosimo Catania from Intesa Sanpaolo, Gabriele Galateri from Generali and independent director Luigi Zingales.

Italy’s former phone monopoly is divesting assets, cutting jobs and is reviewing a possible spinoff of its fixed-line telephone network in Italy, a move that could generate cash to reinvest in expanding coverage. The company said yesterday that the review of the possible spinoff will be completed at a special board meeting scheduled for May 23.

The network may be worth as much as 15 billion euros, according to Marco Fossati, whose family’s Findim Group SA is Telecom Italia’s second-largest shareholder. Corriere della Sera reported today that the asset could be valued at 16 billion euros in a spinoff.

Telecom Italia is considering a sale of an initial 30 percent stake in a new company to state lender Cassa Depositi e Prestiti, which may invest about 2 billion euros, people familiar with the matter said last month. Telecom Italia could also consider an initial public offering of the division in the future, another person said last month.

Telecom Italia intends to keep a majority stake in the network company, Bernabe said today.

Telecom Italia’s first-quarter sales dropped 8.1 percent to 6.8 billion euros, with revenue in Italy falling to 4.02 billion euros from 4.48 billion euros. Net income fell to 364 million euros in the period from 605 million euros a year earlier. The company confirmed its 2013 financial targets.

To contact the reporter on this story: Daniele Lepido in Milan at dlepido1@bloomberg.net

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

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