Telecom Italia Board Is Said to Consider M&A Options Soon

Telecom Italia SpA’s board plans to evaluate measures at a meeting next week to bolster the company’s mobile-phone business, including potential mergers and acquisitions, said two people with knowledge of the matter.

One option that will be discussed at the April 11 gathering is a potential combination with Hutchison Whampoa Ltd.’s wireless unit H3G SpA, one of the people said, asking not to be named because the deliberations are private. While Telecom Italia could be interested in eliminating a competitor, the Milan-based company doesn’t want to spend cash, and offering stock would dilute investors’ interest, the person said.

H3G is the smallest of Italy’s four network carriers with

9.5 million customers at the end of last year. Based on its reported earnings and multiples of publicly-traded European carriers compiled by Bloomberg, the Hutchison unit could be valued at about 1.5 billion euros ($1.9 billion) without a premium.

“Consolidation in the Italian market would have strong industrial logic and going from four to three operators via in-market consolidation would create value for all remaining operators,” said Luigi Minerva, an analyst at HSBC Holdings Plc in London, who rates Telecom Italia’s stock neutral.

Since 2011

Spokesmen for Telecom Italia and H3G declined to comment. A Hutchison spokesman in Hong Kong didn’t return phone calls and an e-mail seeking comment.

A representative for Goldman Sachs declined to comment.

Telecom Italia jumped 7.8 percent yesterday in Milan trading after Bloomberg News reported the scheduled board meeting and the discussions over a potential H3G deal. The stock rose as much as 9.9 percent for its biggest intraday increase since August 2011.

Today, the shares slipped 2.9 percent to 56.2 cents at 9:19 a.m. in Milan. Hutchison fell 2.6 percent to HK$79.90 on the Hong Kong exchange.

Telecom Italia Chief Executive Officer Franco Bernabe has repeatedly called for consolidation in Italy’s 40 billion-euro telecommunications industry. The former monopoly holds the largest share of the country’s wireless market, followed by Vodafone Group Plc, VimpelCom Ltd.’s Wind unit and H3G.

Antitrust Issues

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.

H3G’s revenue rose 10 percent last year to 1.97 billion euros, while earnings before interest, taxes, depreciation and amortization climbed about 3 percent to 264 million euros, according to Hong Kong-based Hutchison’s annual results.

Western European phone companies trade at an average enterprise value, which includes debt, of about 5.8 times Ebitda, data compiled by Bloomberg showed.

A combination of Telecom Italia with HG3 would create an operator with about 45 percent of Italy’s wireless subscribers, based on data compiled by regulator Agcom for the third-quarter of 2012. Antitrust scrutiny would have the potential to stop a deal or impose significant remedies, UBS AG analysts wrote.

“While the pay-off is potentially large, the actual odds of this deal are low in our view because of antitrust control and fiscal issues,” Andrea Devita, an analyst at Banca Akros SpA, said by phone.

Sweden, Ireland

Hutchison is working with Goldman Sachs Group Inc. to examine the possibility of merging H3G with Telecom Italia, la Repubblica reported yesterday, without saying where it got the information.

As Asia’s biggest investor in mobile-phone networks in Europe, Hutchison’s Three division also operates in the U.K., Sweden, Denmark, Austria and Ireland.

Telecom Italia is selling assets and cutting jobs as it looks for ways to reduce debt and raise money for investments. The company is considering spinning off its fixed-line network, an asset estimated by Findim Group SA, the carrier’s second-largest shareholder, at about 13 billion euros to 15 billion euros.

Telecom Italia is controlled by Telco SpA, an investment group that includes Telefonica SA, Intesa Sanpaolo SpA, Assicurazioni Generali SpA and Mediobanca SpA.

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