Telecom Italia Writedowns Exceed $18 Billion Since 2011

Telecom Italia SpA’s 2.2 billion-euro ($2.9 billion) goodwill writedown for the first half brings the amount of impairment losses by Italy’s largest phone company to 14 billion euros since 2011 as its stock heads for the ninth consecutive annual decline.

The cost sank Milan-based Telecom Italia into a net loss of

1.41 billion euros, compared with net income of 1.24 billion euros a year earlier. The carrier reported 7.4 billion euros in goodwill writedowns in 2011, followed by 4.3 billion euros in

2012. Telecom Italia today cut its full-year earnings forecast as wireless competition intensifies.

With its debt rating one step shy of junk and after failing to sell a stake to Hutchison Whampoa Ltd., Telecom Italia is working on spinning off its fixed-line assets to bargain for a regulatory reprieve. Chief Executive Officer Franco Bernabe is relying on growth in Brazil and Argentina, which account for about 40 percent of the company’s revenue, to offset a slump in its home market.

“It’s a mistake to believe the spinoff may solve all the phone company’s problems, as it is only one ingredient of a recipe,” Oreste Pollicino, a professor at Bocconi University, said in a phone interview. “Telecom Italia should aim to solve its financial issues by exploiting the most valuable markets like Brazil and Argentina.”

Italy Slump

Telecom Italia will continue to pursue consolidation opportunities even after talks to combine with Hutchison’s local unit ended because of valuation differences, Bernabe said during a conference call. The CEO ruled out a capital increase or a sale of the Brazilian business to reach a debt-reduction target.

The shares fell 3.9 percent to 49.2 cents at 2:36 p.m. in Milan. Down 28 percent this year, the stock is the worst performer on the 24-company Bloomberg Europe Telecommunication Services Index, which has gained 9.3 percent.

Telecom Italia has a market value of 8.9 billion euros. That compares with its 28.8 billion-euro in adjusted net debt at the end of June. Standard & Poor’s and Moody’s Investors Service both rank the carrier’s debt at the lowest investment grade. The carrier today confirmed its goal to lower the measure to less than 27 billion euros this year.

Downgrade Risks

“The previously mentioned unfavorable macroeconomic and market context also forces us to consider the downgrading of the credit rating assigned by the rating agencies as one of the possible risks that the company must face,” Bernabe said in a note.

Credit-default swaps insuring Telecom Italia’s debt for five years rose as much as 7.7 percent to 368 basis points, signaling a deterioration in creditworthiness. The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

First-half revenue declined 7 percent to 13.76 billion euros, compared with the 13.7 billion-euro average estimate of four analysts compiled by Bloomberg.

Sales in Italy, where competitors include Vodafone Group Plc and VimpelCom Ltd.’s Wind unit, slumped 10 percent, while Ebitda dropped 13 percent. The carrier didn’t break out second-quarter figures.

Argentina, Brazil

Earlier this week, Tim Participacoes SA, Telecom Italia’s Brazilian unit, reported an 8.7 percent jump in second-quarter revenue and a 12 percent increase in net income. The Argentinian unit boosted first-half sales by 22 percent and profit by 14 percent.

Spain’s Telefonica SA is the biggest investor in Telco SpA, the holding company that owns almost 22.5 percent of Telecom Italia. Other holders are Assicurazioni Generali SpA, Intesa Sanpaolo SpA and Mediobanca SpA.

Telco’s partners, which agreed in February 2012 to renew their agreement for three years with an exit option in September 2013 and August 2014, may use the first window in September to revoke the accord, a person with knowledge of the matter has said. Yesterday, Generali CEO Mario Greco said the insurer would dispose of its Telecom Italia stake under the right conditions, while Generali hasn’t made a decision on an eventual exit from Telco in September.

Last month, Telecom Italia said it ended talks with Hong Kong billionaire Li Ka-shing’s Hutchison to combine their Italian mobile-phone businesses. Weeks later, Telefonica and Royal KPN NV agreed to merge their German wireless businesses to become the country’s biggest carrier by customers.

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