Telecom Italia and Vivendi
Brazil vs Vivendi
We update our TI estimates for the latest fx moves, leading us to cut 2015e/2018e
EBITDA and EPS by between -1% to -3%. We cut our PT to EUR1.15 for ords which
leaves only a 4% upside, unattractive vs c. 16% for the sector. However we note that
Vivendi (EW) keeps increasing its stake in TI and the press is speculating that it
could go to a 20% stake. We struggle with the strategic merits of Vivendi’s
investments but it is likely to continue to support TI shares and we remain EW. TI
trades on 16e EV/EBITDA of 6.4x and EV/OpFCF of 12x, in line with peers. We
prefer DTE (OW), TEF DE (OW), BT (OW) and ORA (OW) in the sector.
Cutting estimates on Latam fx. TI is exposed to Brazil through its subsidiary TIM P that
represents c 19% of the group’s EBITDA (8% of EV). We update our forecasts to reflect
the lower EUR/BRL since our last update, we now use an average EUR/BRL 3.7 for 2015
and 4.5 thereafter, respectively a -6% and -18% depreciation. This leads us to cut group
estimates: 2015e EBITDA by -1% and c. -3% for the following years with a similar impact
on EPS. We cut our PT for ords from EUR1.20 to EUR1.15, leaving only +4% upside.
Improvements in Italian mobile, investments in fixed. We expect the domestic mobile
to inflect in the next 12 months as price aggression has materially diminished. The
recently announced merger between WIND and Hutch should sustain the more rational
competitive environment. The collapse of the merger proposal in Denmark raised
uncertainty as to whether the deal in Italy could also fail, but we believe the Italian
market presents different characteristics and the deal is therefore likely to go through.
On fixed, TI is investing to roll-out a NGN. This should enable it to foster faster growth
of the BB retail market, although it should lose on wholesale due to higher competition.
What is Vivendi’s end goal? Vivendi holds 15.5% of TI’s ordinary shares and may raise it
to 20% (Les Echos). Vivendi is not represented at the BOD but is surely aware that TI’s
bylaws allow a shareholder with a simple majority to get two-thirds of the BOD seats. We
note though that previous non-Italian investors had a mixed experience in exercising
control. Regarding the “what for” we see little possibility or need for a rapid change in TI’s
strategy or operations. BBG reported that Vivendi may push for a sale of Brazil: we do not
believe this is possible short term (see On the road in Brazil). Les Echos report that
Vivendi sees strategic merits in TI’s customer base to sell content. But we do not see
why that requires taking a stake in TI. So Vivendi may just be opportunistic, building a
controlling stake at no premium. With Orange (OW) saying that if cross-border merger
started TI could be a partner, Vivendi may be just playing consolidation upside.
Risks: The main upside risk is that Vivendi decides to make a full bid on TI.
Consolidation in Brazil happening sooner than our expectations is another upside risk.
The main downside risks are that the merger of WIND and Hutch does not go through.
Brazil is another risk. Barclays economists recently cut GDP forecasts for Brazil (Brazil:
Recession, Deficits And Downgrades), so risk is on the downside.