A group of directors appointed by Telecom Italia SpA to review a potential merger with Hutchison Whampoa Ltd.’s local unit remain divided as the Italian company’s board heads into a meeting today, according to five people familiar with the matter.
Chief Executive Officer Franco Bernabe, who was asked last month to head a panel to explore a combination of Telecom Italia’s mobile-phone business with Hutchison’s 3 Italia, will brief the board on its findings today in Milan. Some members are skeptical about a deal because of differences in valuation for 3 Italia, the people said, asking not to be named because the discussions are private. Shareholder Telefonica SA is concerned about potential losses in a transaction, two people said.
Bernabe is betting on a linkup with Hong Kong billionaire Li Ka-shing’s Hutchison to revive a stock that hit a 15-year low last month. Today, the shares fell as much as 4.7 percent in Milan for its steepest decline in a month. Telecom Italia, scheduled to report earnings today, may say first-quarter revenue slumped 8 percent to 6.8 billion euros ($8.9 billion) as consumers cut spending on phone services, according to the average of seven analysts’ estimates compiled by Bloomberg.
“I don’t think current shareholders want to give ownership of the company away,” said Andres Bolumburu, a Madrid-based analyst at Banco de Sabadell. “A potential deal with Hutchison isn’t entirely clear due to regulatory barriers and the terms that are being discussed.”
Telecom Italia is 22.4 percent owned by Telco SpA, whose investors include Telefonica, Assicurazioni Generali SpA, Intesa Sanpaolo SpA and investment bank Mediobanca SpA. The shareholders have written down the value of their stakes several times and have considered using Hutchison’s possible entry as 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.
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.
A merger would combine Italy’s biggest wireless carrier with the No. 4. Telecom Italia said April 11 that Hutchison wants to become a leading shareholder in the Milan-based carrier in any deal. Bernabe will need approval from Telecom Italia’s board to carry out due diligence and pursue formal negotiations with Hong Kong-based Hutchison.
Representatives for Telecom Italia, Telefonica, Generali, Intesa Sanpaolo and Mediobanca all declined to comment.
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.
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 today that “contacts between Telecom Italia SpA and 3 Italia SpA 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 28.3 billion euros at the end of 2012 adjusted for some items -- is a concern, a person familiar with the matter has said.
Telecom Italia shares sank as low as 54 cents last month, the lowest level since August 1997. They traded at 62.5 cents, or 2.6 percent lower, at 10:36 a.m. in Milan. Hutchison closed 0.4 percent lower at HK$85.35 on the Hong Kong exchange.
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.
That project isn’t expected to be discussed at today’s meeting, two people said. 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.