Telecom Italia Considers Combination With Hutchison Unit

Telecom Italia SpA, Italy’s biggest phone company, said it’s examining a possible merger with Hutchison Whampoa Ltd.’s H3G unit, a combination that would eliminate a competitor offering the cheapest wireless services in the country.

Telecom Italia’s board plans to discuss the topic at a meeting scheduled for April 11, the Milan-based company said in a statement, confirming a Bloomberg News report yesterday. Hong Kong billionaire Li Ka-shing’s Hutchison said in a separate statement it’s looking at “possible business combinations” with Telecom Italia. The companies described their contacts as “preliminary.”

H3G is the smallest of Italy’s four network carriers, with 9.5 million customers using the “3” brand at the end of last year. Based on its reported earnings and multiples of publicly-traded European carriers compiled by Bloomberg, the 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.

Dilution Concern

While Telecom Italia could be interested in taking out a rival, it doesn’t want to spend cash, and offering stock would dilute investors’ interest, a person familiar with the matter said yesterday, asking not to be named because the deliberations are private.

Telecom Italia rose 1.1 percent to close at 58.5 cents in Milan. Yesterday, the stock jumped 7.8 percent after Bloomberg News reported the planned board meeting and discussions over a potential H3G deal.

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.

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. A bid last year by Hutchison for Eircom Group, Ireland’s biggest phone company, was rejected.

Sales Shrink

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

In January, Hutchison completed the 1.3 billion-euro takeover of Orange Austria to become the country’s third-biggest wireless carrier.

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 Hutchison’s annual results.

“The mobile product offers of 3 are among the most aggressive in the Italian market,” said Filippo Renga, coordinator of wireless market research at Milan’s Polytechnic School of Management. As an example, 3 currently is offering a so-called bundled offer that includes a flat monthly fee of 30 euros for voice and data with a smartphone such as the Samsung Galaxy SIII or iPhone 5.

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

Antitrust Scrutiny

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 communications 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 and fiscal issues,” Andrea De Vita, an analyst at Banca Akros SpA, said by phone.

A spokesman for Italy’s competition regulator in Rome declined to comment on the matter.

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.

Franco Lombardi, the head of Asati, a group of Telecom Italia small investors, said his association backed Bernabe and an eventual “industrial” accord with a foreign partner. Any attempt by Telecom Italia’s controlling shareholders to block a deal would be opposed by the group, he said in a statement.

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