Telefonica Said to Mull Doubling Down in Italian Gambit

As Telecom Italia SpA (TIT)’s financial investors prepare to cut off funding, the future of the phone company at the brink of junk is in the hands of another indebted carrier: Telefonica SA. (TEF)

Telecom Italia directors gather in Milan today, with Madrid-based Telefonica looking to resolve price differences to double its holding by buying out Assicurazioni Generali SpA (G), Intesa Sanpaolo SpA (ISP) and Mediobanca SpA (MB), said people familiar with the matter, who asked not to be named because the discussions are confidential. The Spanish company owns an indirect stake of 10.4 percent, with a market value of 1.1 billion euros ($1.5 billion).

An alternative is for Telefonica to take part in a Telecom Italia capital increase that won’t be matched by the partners in the holding company Telco SpA, the people said. Telco owns a 22.4 percent stake in the Italian carrier.

Chief Executive Officer Franco Bernabe doesn’t have time on his side. Moody’s Investors Service in August gave him three months to strengthen Telecom Italia’s balance sheet or else the company could be stripped of its investment-grade rating, said another person with knowledge of the matter.

‘Many Actors’

“Telecom Italia has become a thriller in which there are way too many actors and the screenplay isn’t clear at all,” said Andres Bolumburu, an analyst at Banco de Sabadell. “Everybody has interests that seem to be incompatible. Telefonica would be keen to remain a shareholder and even increase its stake, but without taking full control of the asset and without paying too much for it.”

Telefonica and the financial investors agreed to pay 4.1 billion euros in 2007 for an 18 percent stake in Italy’s biggest phone company. At the time a compromise by the government to keep the carrier Italian and fend off a takeover bid by AT&T Inc. (T) and Carlos Slim’s America Movil SAB, the new owners have written down their investments at least five times — most recently to 1.20 euros a share — as Telecom Italia shares slumped more than 70 percent over six years.

Now with the financial investors focusing on selling non-core assets, and as a window for a cancellation of the shareholder pact opened this month, Mediobanca this week further devalued its stake to 53 cents a share. Putting more equity into Telecom Italia “is not in line” with Mediobanca’s strategy, CEO Alberto Nagel said on a Sept. 17 conference call.

Asset Sale

Telecom Italia rose 0.4 percent to 59.5 cents at 9:13 a.m. in Milan. Telefonica added 0.7 percent to 11.41 euros in Madrid.

The Italian investors are at the same time discussing a sale of their shares to potential buyers and were approached by different parties, one of the people said, asking not to be named because the discussions are private. If a deal can’t be reached with Telefonica, the Italian partners will consider selling the stakes after exiting Telco, the person said.

Spokesmen for Madrid-based Telefonica and Milan-based Telecom Italia declined to comment. Representatives for Generali, Intesa Sanpaolo and Mediobanca declined to comment on negotiations with Telefonica or other potential investors.

For Telefonica, increasing investments in Italy is a preferred option because a sale would mean another writedown similar to the one Mediobanca has just made. Having sold assets in the past year from Ireland to Central America, CEO Cesar Alierta has averted a rating downgrade and gained the financial flexibility that allowed him to expand in Germany by agreeing to take over Royal KPN’s E-Plus business in an 8.55 billion-euro transaction.

Net Debt

While Telecom Italia’s adjusted net debt reached 28.8 billion euros at the end of June, its Brazilian unit, Tim Participacoes SA (TIMP3), is adding customers. Its stock is up 20 percent this year, boosting its market value to $10.9 billion.

Telecom Italia is “quite valuable” for Telefonica because it could help the Spanish carrier to boost growth in Brazil by potentially divvying up Tim among the current carriers in the country, said Pedro Oliveira, an analyst at Banco BPI in Porto, Portugal. Telefonica reported 49.8 billion euros in net debt as of June. It has a market capitalization of 51.6 billion euros.

Alierta is in favor of a full merger with Telecom Italia over time as he sees Italy as a good market to expand its operations in Europe amid the current consolidation wave in the industry, said people close to him.

“The main problem is how much Telefonica needs to pay to do this as it doesn’t have much room for maneuver,” Oliveira said. “It’s not impossible, but certainly very difficult.”

‘Political Battle’

Politics may be on Telefonica’s side. Prime Minister Enrico Letta was from 1993 until April last year secretary-general of Arel, a research institute of economics and politics that coordinates Italy-Spain forum of dialog with Cidob, a Barcelona-based foundation. Letta was undersecretary for former Prime Minister Romano Prodi when the government blocked AT&T and America Movil’s bid for Telecom Italia.

Another potential investor in Telecom Italia is Egyptian billionaire Naguib Sawiris. Sawiris is in discussions with movie producer and distributor Tarak Ben Ammar, who is an independent board member at Mediobanca as well as Telecom Italia, about a possible investment in the carrier, a person familiar with the matter said.

Sawiris couldn’t immediately be reached for comment. A spokesman for Letta’s cabinet declined to comment.

“It’s mostly a political battle,” said Maximino Carpio, a former Telefonica board member. “The fact that Letta is prime minister now may help Telefonica but it would still be a very difficult deal to get done.”

Source: Bloomberg