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Telecom Italia Delays Network Spinoff Decision to Next Week

In 2008, Telecom Italia created Open Access, a division that manages the grid and offers access to competitors, about two years after BT Group Plc established a similar, fully-owned unit called Openreach. Photographer: Alessia Pierdomenico/Bloomberg
In 2008, Telecom Italia created Open Access, a division that manages the grid and offers access to competitors, about two years after BT Group Plc established a similar, fully-owned unit called Openreach. Photographer: Alessia Pierdomenico/Bloomberg

Telecom Italia SpA delayed a crucial verdict over a proposed spinoff of its fixed-line network that will help decide whether the country’s biggest phone company can have a new source of funding to pare debt.

Its board of directors, after a meeting in Rome yesterday, will gather on May 30 to make a final decision on the plan, Milan-based Telecom Italia said. The spinoff is a complex project because it involves regulatory issues and delaying a decision a week gives the company more time to prepare the final plan, said a person familiar with the matter. Telecom Italia didn’t provide details of the review in its statement yesterday.

Chief Executive Officer Franco Bernabe is considering a sale of an initial 30 percent stake in the new company to state lender Cassa Depositi e Prestiti after a separation, people familiar with the matter have said. Such a move could generate cash used to reduce net debt -- which at 28.8 billion euros ($37.2 billion) at the end of March is more than double Telecom Italia’s market value -- and reinvest in expanding coverage.

Sales at the new company, called Opac SpA, are forecast to slip 0.3 percent this year to 4.6 billion euros from 2012, while earnings before interest, taxes, depreciation and amortization will probably decline 1.6 percent to 2.33 billion euros, according to internal documents seen by Bloomberg News.

The assets have a valuation of about 14 billion euros, based on a multiple of six times Ebitda, said a person with knowledge of the matter, asking not to be named because the numbers are confidential.

Telecom Italia shares fell 1.1 percent to 64.4 cents at 10:04 a.m. in Milan trading.

Rival Access

If Telecom Italia proceeds with the separation proposal, it would also need to hold talks with Agcom, the country’s telecommunications regulator, and agree on a framework of rules governing the new company to ensure rivals have access to its transmission network, the person said.

Telco SpA, the biggest shareholder in Telecom Italia, with a 22.4 percent stake, wrote down the value of its holding to 1.20 euros a share in February. Telco’s investors include Telefonica SA, Assicurazioni Generali SpA, Intesa Sanpaolo SpA and investment bank Mediobanca SpA.

Yesterday’s board meeting took place hours after Standard & Poor’s cut the former phone monopoly’s rating to one step above junk, citing Italy’s “tough” economic environment and competition in its mobile-phone business.

The carrier is separately evaluating a possible combination of its wireless unit with Hutchison Whampoa Ltd.’s 3 Italia, although Spain’s Telefonica remains skeptical of a transaction, people familiar with the matter have said.

Open Access

In 2008, Telecom Italia created Open Access, a division that manages the grid and offers access to competitors, about two years after BT Group Plc established a similar, fully-owned unit called Openreach. Yet, to fully separate a fixed-line network -- considered strategic assets by many governments -- would be unique among European carriers in recent years.

Industry Minister Flavio Zanonato told Parliament this week that the government would closely monitor Telecom Italia’s separation plan.

The government is in favor of naming a Cassa Depositi e Prestiti executive to oversee the new company as its chairman and to ensure a level playing field for other carriers, while Telecom Italia could name its CEO, another person said.

‘Debt Spiral’

“It is a mark of the vulnerability of this company to a debt spiral that they would accept the spinoff of even a minority of their wireline infrastructure with the appointment of a CDP chairman,” Robin Bienenstock, an analyst at Sanford C. Bernstein, said yesterday.

S&P’s one-step cut today to BBB-, the lowest investment grade, puts its rating in line with Moody’s Investors Service’s. Credit-default swaps insuring Telecom Italia’s debt for five years jumped as much as 5.4 percent yesterday, signaling a deterioration in creditworthiness.

In its statement, S&P said it expects a “protracted” decline in Telecom Italia’s Ebitda in Italy and an “insufficient” credit cushion from international subsidiaries. The outlook is stable, reflecting the carrier’s “adequate liquidity” and ability to trim debt, S&P said.

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