April 9 (Bloomberg) -- Telefonica SA is willing to exit its six-year investment in Telecom Italia SpA as Italy’s largest phone company considers a combination with Hutchison Whampoa Ltd.’s wireless business in the country, according to two people with knowledge of the matter.
Telefonica is ready to sell its indirect 10.5 percent stake in Telecom Italia as the carriers have failed to generate synergies over the years, said the people, asking not to be identified because the deliberations are private. No decision has been made and Madrid-based Telefonica would be reluctant to do a deal in which it would take further losses.
Based on the holding’s market value of 1.2 billion euros ($1.6 billion), Telefonica has lost more than 1 billion euros since the initial 2007 investment. Telecom Italia said last week it’s held preliminary contacts with Hong Kong-based Hutchison, the owner of Italy’s smallest network operator H3G, about a potential combination of their businesses, which may give Telefonica and other Telecom Italia investors a chance to exit.
“It will be almost impossible for Telefonica or Telco to find a serious buyer willing to purchase their stake in Telecom Italia due to the huge amount of debt Telecom Italia holds,” Luis Benguerel, an equity trader at Interbrokers in Barcelona, said by phone today.
Telco is the holding company through which Telefonica, Intesa Sanpaolo SpA, Assicurazioni Generali SpA and Mediobanca SpA own 22.4 percent of Milan-based Telecom Italia. In February, Telco wrote down the value of the stake by about $1.2 billion, to 1.20 euros a share from 1.50 euros. That’s still double Telecom Italia’s share price on the Milan exchange.
A Telefonica official declined to comment on any potential plans to sell its Telecom Italia holding. Representatives from Generali, Intesa and Mediobanca also declined to comment.
In a statement released after market close today, Telco said it hasn’t spoken with or exchanged information with Telecom Italia and Hutchison, nor was it aware of its shareholders having contacts with the companies on the issue.
Telecom Italia reiterated in a separate statement that its discussions with billionaire Li Ka-shing’s Hutchison will be a topic for a board meeting scheduled for April 11.
Telecom Italia closed 3.8 percent higher at 59.6 cents in Milan, paring earlier gains of as much as 6.3 percent. Telefonica added 1.1 percent to 10.50 euros on the Madrid exchange.
Credit-default swaps insuring Telefonica’s debt for five years declined 7.9 basis points to 220 basis points, the lowest in three months, signaling improving creditworthiness. The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Hutchison Whampoa may want as much as 29.9 percent of Telecom Italia at no more than 1.20 euros a share, Il Messaggero reported today, without citing anyone.
“A combination of Telecom Italia with Hutchison makes sense from an industrial point of view,” said Emanuele Vizzini, chief investment officer at Investitori Sgr, which owns Telefonica and Telecom Italia shares. “Per share price of 1.2 euros is very steep and not justified by company’s fundamentals, so it would be very hard to find a buyer.”
An exit from Italy would be in line with Telefonica’s plan to focus on European markets such as Germany and the U.K. and lower debt to avert further cuts by rating companies. Other assets on a list of potential businesses for sale include its Irish and Czech divisions, a minority stake in China Unicom (Hong Kong) Ltd. and assets in Central America, people familiar with the matter have said.
In 2007, Telefonica and the Italian financial investors beat billionaire Carlos Slim to secure a stake in Telecom Italia for 4.1 billion euros. Telecom Italia’s market value has since shrunk more than 70 percent. Slim’s America Movil SAB last year made its first major foray in Europe’s telecommunications industry, acquiring stakes in Royal KPN NV and Telekom Austria AG.
Mediobanca plans to present a new strategy by June, including a review of the lender’s stake in publicly traded companies, Chief Executive Officer Alberto Nagel said Feb. 26, reiterating that Mediobanca’s “equity exposure is too high.”
For Hutchison, Telecom Italia’s high net debt, which reached 28.3 billion euros at the end of last year, is a concern, another person familiar with the matter said. 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.
Hutchison “confirms there have been preliminary exploratory contacts between Telecom Italia SpA and 3 Italia SpA as to possible business combinations between them,” it reiterated in an e-mailed statement today.
Hutchison held discussions in 2010 over a sale of the business to Telecom Italia, and the talks didn’t result in a deal because of differences in valuation, people with knowledge of the matter said at the time.
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