Telecom Italia Goes Back to Square One With Spinoff Stalled

Two months ago, Telecom Italia SpA Chief Executive Officer Franco Bernabe had a plan to revive the phone company. He started an in-depth review of a wireless merger with Hutchison Whampoa Ltd. and the board approved a proposal to spin off the fixed-line business.

Much of that has unraveled within the past two weeks. The proposed combination with Hutchison’s 3 Italia unit has ended amid disagreements over price and antitrust concerns. Late yesterday, Telecom Italia said a decision by the country’s communications regulator last week to cut access fees to the Milan-based carrier’s network has stalled the spinoff plan by affecting its feasibility.

Halting the creation of a new company, with assets valued at 14 billion euros ($18 billion) and as many as 20,000 workers, may be negotiating tactics to win regulatory reprieve, said Andrea Rangone, a professor of business strategy at the Politecnico University of Milan. Yet, the setback -- shortly after the botched linkup with Hong Kong billionaire Li Ka-shing’s Hutchison -- may shift investors’ focus back to a stock that is trading at the lowest level in almost 16 years and a company whose net debt is triple its market value.

“Telecom Italia’s heavy debt load, already teetering on the edge of a downgrade to junk, may be pushed over the edge” after its second-quarter earnings report, Robin Bienenstock, an analyst at Sanford C. Bernstein in London, wrote in a report entitled “Telecom Italia: How Much Worse Can It Get? Worse” published yesterday before Telecom Italia announced putting the spinoff plan on hold. The company reports earnings Aug. 1.

‘More Ambitious’

Telecom Italia shares fell as much as 4.1 percent to 48.3 cents, the lowest level since July 1997, and traded 3 percent lower as of 2:38 p.m. in Milan. The stock dropped 4.7 percent on July 12, the day after the Agcom authority cut the price Telecom Italia rivals must pay to rent so-called “last-mile” access to its copper network by 6.5 percent.

“A bigger crisis -- more writedowns, a canceled dividend and a ratings downgrade -- are probably necessary before Telecom Italia does something more drastic,” Bernstein’s Bienenstock wrote in the report.

Bernabe told a parliamentary panel in Rome today the carrier isn’t taking a step back on the spinoff project, though it needs to verify the regulatory position. Bernabe called the proposed grid separation “more ambitious” than one carried out by BT Group Plc. In 2005, the former U.K. phone monopoly created the Openreach unit to provide competitors with access to its lines into homes and businesses under an agreement with the regulator.

Rivals ‘Surprised’

In a joint statement, rivals Vodafone Group Plc, VimpelCom Ltd.’s Wind Telecomunicazioni SpA division and Swisscom AG’s Fastweb unit said they are “surprised” that Telecom Italia’s board had decided to condition its spinoff plan to the regulatory framework.

Franco Lombardi, the head of minority shareholder group Asati, said in a letter to the board yesterday that the stock’s slump “makes Telecom Italia easy prey for non-European operators at a cheap price.”

Telecom Italia was betting on using the spinoff to win lighter regulatory scrutiny, allowing the carrier to focus on faster-growing services such as data and wireless. While phone companies have tried separating fixed-line businesses before, fully carving out an access network -- considered strategic by many governments -- would be unseen among European carriers.

As part of the separation proposal, Telecom Italia was in talks to sell a stake in the new company to state-owned lender Cassa Depositi e Prestiti.

Revenue Impact

While Telecom Italia said the effect of the July 11 Agcom ruling would be equivalent to about 110 million euros in annual revenue -- Telecom Italia reported almost 30 billion euros in 2012 sales -- the decision was significant because it’s the first major ruling since the carrier decided to proceed with the spinoff. Telecom Italia has argued that a separation of the assets would help it bargain for lighter regulations.

An eventual sale of a stake in a new company from the spinoff would bring proceeds to help pare Telecom Italia’s net debt, which stood at 28.8 billion euros at the end of March. Moody’s Investors Service rates Telecom Italia debt Baa3, the lowest investment grade, with a negative outlook.

“Telecom Italia´s rating remains weakly positioned as reflected in the negative outlook and is amongst the most vulnerable in Europe’s telecom´s sector,” Carlos Winzer, a senior vice president at Moody’s, said by phone.

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