Telecom Italia Says Hutchison Wants Control in M&A Plan
Telecom Italia SpA (TIT), which received approval from its board to pursue a possible merger with Hutchison Whampoa Ltd. (13)’s Italian business, said billionaire Li Ka-shing’s company would want control of any combined entity.
Any transaction will likely be held “via contribution in kind or merger,” subject to Hutchison acquiring a stake in Telecom Italia to “become the leading shareholder of the company,” Milan-based Telecom Italia said in a statement after a board meeting yesterday.
A deal would combine Italy’s biggest wireless carrier with the No. 4, Hutchison’s 3 Italia, which is valued at about 1.5 billion euros ($2 billion) based on its reported earnings and multiples of publicly traded European carriers. An entry by Hong Kong-based Hutchison as shareholder could unravel a six-year pact at Telco SpA, whose investors Telefonica SA (TEF), Intesa Sanpaolo SpA (ISP), Assicurazioni Generali SpA (G) and Mediobanca SpA (MB) together hold 22.4 percent of Italy’s former phone monopoly.
“If Hutchison takes control, investors such as Telefonica will probably have to sell their stake or at least reconsider their position,” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valores. “The entrance of a powerful investor such as Hutchison Whampoa through a potential merger would help Telecom Italia solve part of the problems.”
Representatives at Telefonica, Mediobanca, Generali and Intesa Sanpaolo declined to comment.
“Contacts between Telecom Italia SpA and 3 Italia SpA on possible business combinations are still preliminary and exploratory,” Hutchison said in a statement.
The national secretary for Italy’s largest union CGIL, Michele Azzola, called it a “fool project,” in an e-mailed statement today.
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, asking not to be identified because the deliberations are private. Telecom Italia has a market value of 11.5 billion euros.
The carrier’s board designated Chief Executive Officer Franco Bernabe (BNBC) to lead a panel to explore the feasibility of a business merger with Hutchison. Other members include Telefonica’s Julio Linares, Elio Cosimo Catania from Intesa Sanpaolo, Gabriele Galateri from Generali and independent director Luigi Zingales.
They will verify “within a short time the company’s interest in carrying on such a transaction,” Telecom Italia said in its statement yesterday.
The fact that Bernabe won’t be leading the talks by himself and will be flanked by other directors is a signal that some investors aren’t satisfied with his performance, two people familiar with the matter said. At the same time, some Telco investors are skeptical so far about a merger because no business plan has been presented, one of the people said.
Telecom Italia shares rose 3.8 percent to 64 cents in Milan. That’s still about half of the 1.20 euro per-share valuation by Telco investors after they wrote down their stake this year.
The stock dropped to 53.6 cents on April 3, the lowest level since August 1997. It has gained 10 percent since Bloomberg News reported April 4 the Hutchison discussions.
Hutchison fell 1.1 percent to HK$81.25 in Hong Kong.
Directors also discussed a proposed spinoff of Telecom Italia’s fixed-line network, valued at at least 13 billion euros by Telecom Italia’s second-largest shareholder Findim Group. State lender Cassa Depositi e Prestiti SpA may acquire a stake in it, a person familiar with the matter said in December.
Hutchison held discussions in 2010 over a sale of its wireless 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. A bid last year by Hutchison for Eircom Group, Ireland’s biggest phone company, was rejected. Hutchison’s Three division also sells services in the U.K., Sweden, Denmark and Austria.
“There’s certainly a rationale for Hutchison to pay a control premium,” said James Britton, a London-based analyst at Nomura Holdings Inc. “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 is selling assets and cutting jobs as it looks for ways to reduce debt and raise money for investments. Last December, its board rejected an offer by Egyptian billionaire Naguib Sawiris to buy new Telecom Italia shares for at least 2 billion euros.
Franco Lombardi, the head of Asati, a minority shareholder group, said a deal would make sense only if Hutchison makes a major investment. “If not and they would only replace financial investors such as Intesa Sanpaolo and Mediobanca, we will oppose,” he said.
Another sticking point for a potential Hutchison deal may be tax losses accrued to 3 Italia, said Fidentiis Equities SA analyst James McKenzie, who values them at 9 billion euros.
“For a share for share transaction, we believe that a 2 billion-euro valuation” would be “approximately fair” for 3 Italia, he wrote in a note. “Upside could come if Telecom Italia is in a position to reclaim tax losses.”