Telecom Italia Said to Value Brazil Stake at $12 bln

Telecom Italia SpA (TIT), the phone company that was stripped of its investment-grade rating, is seeking at least 9 billion euros ($12 billion) for its controlling stake in Brazilian mobile carrier Tim Participacoes SA (TIMP3), according to a person with direct knowledge of the matter.

A disposal of Telecom Italia’s 67 percent holding at that price would value Tim at about $18 billion, a 50 percent premium to the Rio de Janeiro-based company’s market value based on Oct. 8 closing price. The stake could fetch as much as 10 billion euros, said the person, asking not to be identified because the deliberations are confidential.

Tim rose to a 1 1/2 year high in Sao Paulo yesterday, and Telecom Italia added 6.2 percent in Milan. Moody’s Investors Service cut Telecom Italia’s rating to junk this week, saying a further downgrade is possible unless the Milan-based carrier strengthens its balance sheet. The resignation earlier this month of Chief Executive Officer Franco Bernabe, who opposed a sale of Latin American assets to pare $39 billion in net debt, removed an obstacle to a change of ownership in Brazil’s second-largest wireless carrier. Telefonica SA (TEF), Telecom Italia’s biggest shareholder, is in favor of a disposal, people familiar with the matter have said.

‘Strategic Asset’

“Tim is a strategic asset for the company because it’s the only one that compensates for a declining domestic market,” Carlos Winzer, an analyst at Moody’s, said in a phone interview. “Whichever new strategy that Mr. Patuano and his team comes up with won’t be easy to execute.”

Telecom Italia’s board is scheduled to gather Nov. 7, when new CEO Marco Patuano is expected to propose a turnaround plan that will probably address the future of the Latin American business. Telecom Italia also sells phone services in Argentina, while Italy accounted for 60 percent of the company’s 2012 revenue.

The company hasn’t given a mandate to banks as an internal evaluation of Tim’s future is at an early stage, said three people familiar with the matter, who asked not to be named discussing private deliberations.

There’s no “formal or informal process ongoing” for disposing of its Tim stake, Telecom Italia said in a statement.

Tim rose as much as 10 percent and closed up 6.7 percent at 11.63 reais, the highest price since April 2012. The stock has gained 42 percent this year, the second-best performer in the benchmark Ibovespa index. Telecom Italia jumped as much as 7.9 percent and closed at 66 euro cents in Milan.

Enterprise Value

The Brazilian carrier, with more than 72 million customers at the end of June, has a so-called enterprise value — which includes debt — of 30.3 billion reais ($13.8 billion) after yesterday’s jump, according to data compiled by Bloomberg.

In a sale, Tim’s enterprise value could be in a range of 14 billion euros to 15 billion euros, the person with direct knowledge of the matter said.

An alternative to a sale of Tim to one buyer is to break up the unit and divide its customers among other carriers, although that option would be more difficult to execute, said the person.

Brazilian law doesn’t allow one company to control more than 50 percent of the market or more than one operating license from the Anatel regulator, according to Communications Minister Paulo Bernardo. Telefonica and three other mobile-phone companies — Oi SA, America Movil SAB and NII Holdings Inc. (NIHD) — aren’t eligible to own Tim and their own Brazilian businesses at the same time, he said last month.

Four Preferred

Speaking to reporters in Brasilia yesterday, Bernardo said more competition is preferable when asked whether the market would be allowed to go from four telecommunications companies to three.

Mergers and acquisitions in Brazil’s phone industry is heating up. This month, Oi, the country’s biggest carrier, agreed to merge with Portugal Telecom SGPS SA to create a trans-Atlantic company with 100 million customers and gain more clout against Telefonica and America Movil.

Vodafone Group Plc (VOD) isn’t interested in bidding for Tim, another person with knowledge of the matter said this month.

Telefonica, Spain’s biggest phone company, agreed last month to gradually buy out financial investors in the vehicle that owns 22.4 percent of Telecom Italia. In the event of a breakup of Tim, Telefonica will need to convince Anatel that having three wireless carriers rather than four benefits consumers as reduced price competition would allow the companies to invest in their infrastructure and service quality.

The U.S. government blocked AT&T Inc. (T) in 2011 from acquiring Deutsche Telekom AG (DTE)’s T-Mobile USA unit to preserve a four-carrier market. European regulators are set to review Telefonica’s takeover of Royal KPN NV’s German business, a bellwether case on the continent since it would reduce the market to three operators.

Source: Bloomberg