By Leila Abboud, Pamela Barbaglia and Stephen Jewkes
PARIS/LONDON/MILAN (StartName) – Telecom Italia has lost a promising path to earnings growth by failing to secure Brazilian broadband business GVT and may now turn from hunter to hunted in a fast-consolidating telecoms industry.
Winning the auction for French media company Vivendi’s GVT was vital for both Telecom Italia and its rival, Spain’s Telefonica, as their European markets have been shrinking. Italy was gripped by a mobile price war for much of last year, revenue is falling and competition remains tough.
Telecom Italia lost out to Telefonica as it could not afford to top its 7.45-billion-euro offer for GVT. Telecom Italia has debts of 32 billion euros ($42 billion) according to Moody’s, and lost its investment-grade credit rating last year.
Buying GVT would have solved Telecom Italia’s biggest weakness in Brazil – the fact that its mobile business lacks the broadband networks of its local rivals.
It may now consider exiting the country, where it makes a third of its revenue, helping it pay some of its debts but leaving it even more reliant on a sluggish domestic market.
Seven bankers and investors interviewed by StartName on Friday portrayed Telecom Italia as a company without a clear direction that would struggle to raise fresh cash from shareholders to fund important network improvements.
Chief Executive Marco Patuano “has a lot of egg on his face”, said one Milan-based senior banker. “He aggressively sold (the GVT deal) as the answer to Telecom Italia’s woes and now he has to go back to the financial community and tell them what’s next.”
“There won’t be a capital increase simply because it’s going to take some time for the company to recover from the setback and come up with a new strategy – you can’t ask for fresh equity without a clear strategic plan.”
Adding further confusion is Telecom Italia’s changing shareholder base. Telefonica is now its largest indirect shareholder, with a 14.8 percent interest, but will sell part of that stake to Vivendi as payment for GVT. Italian financial institutions also want out of what has been a money-losing investment since 2007.
Vivendi is likely to accept to take from Telefonica some 5.7 percent of Telecom Italia shares, or 8.3 percent of voting rights, sources told StartName. Analysts have speculated Vivendi could later buy out the Italian investors too.
Some said Patuano’s predicament made Telecom Italia a potential takeover target for the likes of Deutsche Telekom or Vodafone.
Niall Dineen, a portfolio manager at AGF International Advisors and a shareholder in Telecom Italia and Telefonica, said Telecom Italia was “no longer a consolidator” but had become a “prey in the industry”.
Telecom Italia and Telefonica compete in Brazil as owners of number-two mobile carrier Tim Participacoes and number one Vivo respectively.
A banker advising Telecom Italia said the Italians had expected Vivendi to favor their GVT offer, despite Telefonica putting in a higher bid, because of the prospect of content partnerships and Vivendi’s supposed interest in Italy.
A FUTURE IN BRAZIL?
Patuano’s strategy unveiled last year called for asset disposals in Argentina and elsewhere to help fund network investments in Italy to boost broadband speeds and roll out 4G mobile technology. He maintained that Telecom Italia’s Brazilian business TIM Brasil remained key to the group’s future.
Patuano’s devotion to Brazil may soon be tested. Grupo Oi, Brazil’s largest telecoms company, has signaled it is exploring a bid to split TIM Brasil between itself, Mexico’s America Movil and Telefonica.
Telecom Italia said on Wednesday it knew nothing of the approach for TIM Brasil, which has a market capitalization of $13.3 billion. After losing GVT on Thursday, the company said it would stick to its strategic plan to develop Brazil.
However, analysts and bankers said Telecom Italia might change its mind.
“Oi’s recent announcement … could represent an exit strategy for Telecom Italia from Brazil, where it could be paid a significant premium for its asset,” said Espirito Santo.
Dineen at AGF said: “Its Brazilian business will be gobbled up and it will probably get a good price for it.”
It remains to be seen whether Oi, which is heavily indebted itself after buying Portugal Telecom, will be able to pull off a bid for TIM Brasil, several bankers said. A joint bid to break up TIM’s assets among the three local carriers could also run into regulatory opposition, the people said.
A sale would help Telecom Italia to cut debt. Ratings agency Fitch estimated on Friday that selling TIM Brasil could reduce leverage on a net debt to EBITDA basis by 0.2-0.4 times. Telecom Italia’s leverage ratio, which was 2.9 times at the end of 2013, is likely to increase this year due to falling profits and weak free cash flow, Fitch said.
The banker working for Telecom Italia said Patuano “doesn’t want to sell Brazil, but there is no plan B right now”.
He laid out three options for the group: sell to a larger European peer such as Deutsche Telekom, pursue a tie-up in Brazil, perhaps launching a capital hike to bid to buy Oi, or pursue a telecom-to-media consolidation plan in Italy via a deal with Silvio Berlusconi’s Mediaset.
He added that he saw Telecom Italia’s “best option” was to look at a deal to partner with Oi in Brazil since it would make sense to merge the biggest fixed-line operator with the number-two mobile operator.
Another banker downplayed the chances of a foreign company buying a more domestic-focused Telecom Italia because the poor state of the Italian market would act as a “poison pill”.
Carlos Winzer, credit analyst at Moody’s, saw one silver lining for Telecom Italia in the GVT loss, namely how it would pave the way for Telefonica to part ways with Telecom Italia.
The value of Telefonica’s shares in Telecom Italia have plummeted by almost 70 percent since it entered in April 2007. A consortium made up of Telefonica and four Italian firms acquired a 23.6 percent stake in Telecom Italia for around 4.1 billion euros, valuing Telecom Italia’s shares at 2.82 euro per share.
The shares closed at 0.88 euro on Friday.
“At least Telecom Italia will truly be independent now from Telefonica, ending the complicated relationship between the two companies,” said Winzer.
(Additional reporting by Nishant Kumar and Anjuli Davies in London, Robert Hertz in Madrid; writing by Keith Weir and Leila Abboud; editing by Tom Pfeiffer)