Telecom Italia Is Said to Plan $13 Billion Network Spending
Telecom Italia SpA (TIT) is planning 10 billion euros ($13 billion) in fiber-optic investments for its fixed-network unit, whose spinoff is expected to win board approval today, said two people familiar with the situation.
The spending, to be made over 10 years, will help the new network unit Opac SpA offer faster Internet access and services including high-definition video, said the people, who asked not to be identified because the plan hasn’t been made public. The investments would be funded by cash generated by the network unit as well as contributions from investors, the people said.
Chief Executive Officer Franco Bernabe is considering a sale of an initial 30 percent stake in the new company to state lender Cassa Depositi e Prestiti after a separation, people familiar with the matter have said. The assets have a valuation of about 14 billion euros, based on a multiple of six times earnings before interest, taxes, depreciation and amortization, a person familiar with the matter said this month.
“Opac SpA’s shareholders could get a good return of these investments because the company will probably work as a utility with strong cash flow,” said Andrea Rangone, a professor of business strategy at Politecnico of Milan. “Revenue and profits will be strongly influenced by the decisions of Italian authority which will regulate the unbundling, defining the price that other operators have to pay for access.”
Cash Generation
A Telecom Italia representative declined to comment.
A spinoff would bring regulatory benefits and generate cash that could help Milan-based Telecom Italia reduce its net debt – – which at 28.8 billion euros at the end of March is more than double the company’s market value — and invest in expanding coverage. Regulatory benefits are the company’s initial focus, two people said.
Telecom Italia shares have lost about 70 percent of their value in the past six years as competition and regulations weighed on subscriber growth and profitability. Telco SpA, a group of investors made up of Telefonica SA (TEF), Assicurazioni Generali SpA (G), Intesa Sanpaolo SpA (ISP) and Mediobanca SpA (MB), is the biggest shareholder with a 22.4 percent stake.
The stock rose 0.5 percent to 65.1 cents at 9:05 a.m. in Milan, giving the company a market value of 11.9 billion euros.
Societe Generale SA (GLE), after meeting with Telecom Italia managers yesterday, also said its board will probably approve the spinoff proposal today.
“We are likely to hear that Telecom Italia has agreed in principle to move ahead with network separation and discussions with CDP or others can start in earnest,” the bank wrote in a note yesterday.
Debt Target
While such a move could generate cash, Telecom Italia said the proposed network separation isn’t a means for cutting debt, Societe Generale said.
“Telecom Italia is confident that the three efficiency programs that they have implemented will allow them to hit their year-end target, of net debt below 27 billion euros, and currently they are under no stress from the rating agencies,” according to the note.
Last week, Standard & Poor’s cut the former phone monopoly’s rating to one step above junk, citing Italy’s “tough” economic environment and competition in its mobile-phone business.
If Telecom Italia proceeds with the separation proposal, it would also need to hold talks with Agcom, the country’s telecommunications regulator, and agree on a framework of rules governing the new company to ensure rivals have access to its transmission network, a person familiar with the situation said this month.
The carrier is separately evaluating a possible combination of its wireless unit with Hutchison Whampoa Ltd. (13)’s 3 Italia, although Spain’s Telefonica remains skeptical of a transaction, people familiar with the matter have said. A merger would also likely attract antitrust scrutiny, analysts have said. Telecom Italia said on May 8 it plans to complete the review in 30 days.
Bloomberg
