Telecom Italia could retain PT Portugal if it bids for Oi
Telecom Italia is looking to conduct an in-depth analysis of PT Portugal and could aim to keep the asset if it launches an offer for its Brazilian owner Oi, it is understood.
Including PT Portugal in any Oi bid could force the Italian incumbent to launch a rights issue. But this would be palatable if the transaction creates value and will have a positive impact on Telecom Italia's (TI) future earnings, it was argued. The enterprise value of the whole of Oi is estimated at around EUR 19bn at current prices and exchange rates.
Extending Oi due diligence on its Portuguese and African activities is normal practice to assess the value of the company in the context of a potential bid, a person close to TI said.
Earlier this week, TI’s management was empowered by the board to explore a merger between its Brazilian arm Tim Participações, also known as Tim Brasil, and Oi, potentially joining the country’s second largest mobile operator with the leader in the fixed-line segment.
TI might need to raise around EUR 5bn to make an offer for the whole of Oi, which besides PT Portugal also includes some African assets that the target is planning to offload, according to reports. TI could try to sell on the Portuguese and African activities, it was also reported.
But PT Portugal is considered a good asset by TI’s management. It has good coverage and a smart strategy in place, a source close to the situation said, adding: “They have made all the investments that an incumbent should be making.”
This view is based on analysts’ presentations rather than a close look into the business, which needs to be conducted to evaluate any future proposal, it was said.
The process is still at preliminary stages. No due diligence has been conducted and the structure of any potential deal still needs to be discussed, the source close to the situation said. The Italian incumbent has more headroom to bid exclusively for Oi’s Brazilian assets than for the whole company, he noted.
Gaining exposure to the Portuguese market was never part of TI’s strategic plan, and including PT Portugal in an offer for Oi would have a significant impact on the bidder’s leverage, a banker following the situation pointed out.
TI’s adjusted net adjusted debt/TTM EBITDA stood at EUR 2.96x as of 30 September 2014, while Oi’s net debt/TTM EBITDA was 3.57x. But the latter’s leverage reaches 4.5x excluding one-offs related to sale of towers, the source close noted.
In the event TI decides to bid just for Oi’s Brazilian assets, and wants to limit the risk of selling on PT Portugal, one option would be to sign a bridge loan covering the cost of PT Portugal, which could be repaid once the asset is sold, the first banker and another following the situation said.
Oi has already received takeover offers for PT Portugal from Altice [AMS:ATC] and a consortium made up of private equity groups Apax Partners and Bain Capital, valued at EUR 7.025bn and EUR 7.075bn, respectively.
A bid for Oi excluding the Portuguese and African assets would have a limited impact on TI’s leverage and would require a modest cash component, even if TI takes a minimum 51% of the resulting entity, the second banker noted.
TI needs to keep the Brazilian activities consolidated on its balance sheet, as TI’s leverage would not be sustainable without the EBITDA contribution from these assets, bankers and other industry sources agreed.
Tim Brasil contributed 18% to TI’s 2013 EBITDA.
A Tim Brasil all-share bid on Oi at a 15% premium would give TI a 45% stake of the combined Tim/Oi entity. TI would then need to add about EUR 800m in cash to reach the 51% mark, according to Dealreporter analytics.
TI could look to raise the cash it needs at the subsidiary or parent company level, but the latter would be simpler, said the second banker. Considering the limited impact on leverage, it could even rely on existing credit lines as a form of acquisition financing, he noted.
According to a Kepler Cheuvreux research note, merging Tim Brasil and Oi, ex-Portugal and Africa, would generate EUR 9bn in synergies. But even after taking into account benefits such as avoiding the need to roll-out a fixed-line network, cost savings and revenues increases, a figure in the region of EUR 6bn-7bn looks more realistic, bankers agreed.