Event Driven Telecom: Telecom Italia
BUY
TIT IM: Eur 0.8215
August 20, 2013
TIT seems to be heading into a bidding war with TEF over GVT as the latest press reports suggest that TIT is preparing a bid valuing GVT at €7bn. Under this rumored bid, VIV would get a 20% stake in TIT and a stake in the merged Brazilian entity (comprised of Tim Participacoes and GVT). This is part of a broader alliance, which TIT would plan to create with VIV. Previously, Telefonica offered €6.7bn comprised of BRL11.96BN cash and a 12% stake in the merged Brazilian subsidiary of TEF, Telefonica Brasil. Separately, TEF also offered to sell 8.3% stake it owns in TIT to VIV, for which VIV could settle by cash. The latest development is that Telefonica is planning to offer a content alliance to VIV. Any one of these deals is likely to require the approval of Brazilian regulators such as Anatel and CADE before it could become effective. From VIV’s point of view, both deal offer the optionality to participate in the Brazilian consolidation story while benefiting from potential side deals that allow VIV to leverage its content assets. The drawback in the TIT’s offer is obviously the lack of cash in the deal terms. However, both offers have common drawbacks. By retaining a stake in the merged Brazilian entity (under both offers), VIV may also have to participate (e.g. capital raise) in any future capex investments by these entities. Particularly, TIM plans to invest $1.82bn annually over the next three years and participate in the upcoming 4G spectrum auction. In addition, these offers will add additional listed companies to VIV’s holding structure, potentially increasing the discount to the VIV’s NAV. Hence, despite the bidding war, we are uninterested (as mentioned in our Aug 5 report) by the VIV’s discount. We estimate that VIV’s discount is below 10% under both TIT and TEF offers.
On the other hand, TIT’s restructuring story seems to be improving. The asset sales plans are progressing at a steady pace with expectations that TIT could sell a majority of its towers. The Argentine business sale is still subject to regulatory approvals but on its track for near term completion. The corporate governance issues seem to be subsiding with the recent dissolution of the Telco holding and the appointment of an independent board. Furthermore, Telefonica is under pressure from the Brazilian regulator to either sell its TIT stake or exit from VIVO. On a SOTP basis (assuming no GVT deal), we value TIT around €23bn (equity value), implying a 51% upside. On a relative basis, TIT looks undervalued both on EV/Sales vs OP Margin screen and EV/Asset vs ROA screen. Although the current high debt situation, operational uncertainties in Brazil and Italy are underpinning this wide discount to our estimates, we expect this discount to narrow going forward. Hence, we would buy TIT.
FULL REPORT ATTACHED