Hutchison and Vimpelcom may yet rue the day they let Xavier Niel, Europe's most aggressive telecoms entrepreneur, into Italy to save their mobile merger. So might Vincent Bollore, Vivendi chairman and fellow billionaire, whose 3 billion euro ($3.3 billion) bet on Telecom Italia a year ago looks harder to justify as new competitive threats gather.
By allowing Niel's Iliad to become Italy's fourth-placed mobile operator, Li Ka-Shing's Hutchison and Mikhail Fridman's Vimpelcom have probably done enough to save the deal from rejection by Europe's trust-busters. But they've dealt a blow to a long hoped for recovery in Italy's mobile market -- where service revenue has fallen 30 percent since 2011. Mobile prices there have fallen 18 percent in the past three years, according to Bloomberg Intelligence, and there won't be any relief now from so-called "market repair" (when four competitors are cut to three).
Instead, armed with spectrum and a roaming contract, Niel will try to repeat in Italy what he did in France in 2012, namely using rock-bottom prices and generous data allowances to grab mobile customers. That doesn't mean Iliad will find Italy as easy. It's starting from scratch commercially (no stores, no brand), unlike in France where it had a popular broadband service and lots of existing customers. Italian mobile prices are already low so there's less room to undercut. For example, Telecom Italia's average revenue per mobile user in Italy is just 12 euros a month, whereas in France Orange enjoyed ARPUs above 30 euros before Niel arrived.
Yet it would be unwise to underestimate Niel. The roaming contract offered as remedies by Hutchison and Vimpelcom includes super-fast 4G mobile and several thousand mobile towers. Now the question is how quickly Iliad takes share and how the pain is spread between the three other operators: Telecom Italia, Vodafone and the new Hutchison-Wind combination. Goldman Sachs forecasts a 6-12 percent drop in mobile service revenue by 2020, hitting Telecom Italia free cash flow by 5-10 percent. If Iliad knocks 1 euro from mobile ARPU, Telecom Italia's Ebitda would fall 3.8 percent and Vodafone's 1.8 percent, the bank says.
Vivendi, Telecom Italia's dominant shareholder, didn't need another problem in Italy. The Italian company's share price is down about 40 percent since June 2015 when Bollore started building the stake. Most of its shares were bought at an average of 1.14 euros. On Thursday, they closed at 63 euro cents.
And it's not just Niel and mobile that Bollore has to worry about. Telecom Italia faces a new challenge to its traditional fortress: the fixed-line and broadband business. Unlike other former monopolies in Europe, it's never had to compete with a cable operator offering high-speed broadband. Rivals like Vodafone have to rent fixed-line capacity from Telecom Italia.
That's set to change. Italian utility Enel plans to invest about 2.5 billion euros on a fiber-optic network, which it would then rent out to telecom companies. It's also in talks to buy Metroweb, a broadband operator in the prosperous Northern region, which would make it a serious rival. Enel could be even worse for Telecom Italia than Niel -- analysts peg Italian mobile at about 30 percent of its valuation while fixed services account for about 60 percent.
Bollore says Vivendi is in Telecom Italia for the long-haul since it's central to his plan to create a southern European media powerhouse. Prepare for his patience to be tested.
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