European Telecoms: Italian market - EC clears WIND-3 Italia JV & Iliad as remedy taker
* European Commission approves Hutchison/VIP JV, conditional on Iliad's entry
The Hutchison and VimpelCom (VIP) JV in Italy has been cleared by the EC. The Commission has also
approved the agreement between Hutch-VIP on one side and Iliad on the other (signed in early July)
which set the competitive remedies for the entry of a 4th MNO (see our note Iliad to 'Free' Italy? – 6
July).
* What do we expect from Iliad's strategy in Italy
The Italian mobile market is challenging, but we see room for Iliad to succeed, leveraging its strong
execution capabilities and financial flexibility. We expect four main strategic pillars for Iliad's Italian
venture: 1) a capex-light approach, especially in the first 2-3 years (€450m for frequencies) given Iliad can
leverage the roaming and RAN sharing agreements in the initial phase; 2) investments to step-up subject
to subscriber take-up (network roll-out and bid for 700MHz); 3) a commercial proposition based on
simple and transparent mobile bundles for the low-end and young clusters, with aggressive pricing for
the entry-level (prevailing market price currently ~€10/month) and large data allowance for the high-end
(currently ~3GB/month); 4) a convergent strategy (ie, fixed+mobile) through commercial agreements, JV,
M&A.
* Implications for the Italian market
Higher competitive intensity in the mobile market could trigger two main consequences, in our view: 1)
TI to push on convergence. Offering a sizeable discount on a convergent product could be a good way
for TI to accept price dilution while reducing churn and seeking global ARPU expansion; 2) In-market
consolidation. We believe the market dislocation subsequent to the potential convergence take-up
would push players with sufficient financial fire power and a relatively higher exposure to the mobile
business (Vodafone, Iliad) to build a convergent asset base through M&A.
* Risks for TI and to a minor extent for VOD, WIND-H3G – Opportunity for Iliad
We anticipate: 1) downside risk on consensus top line expectations for all the players exposed to Italy
(group revenues from Italy: TI >75%; VOD ~10%; VIP ~25% (Italy not consolidated); Hutch >5%;
Swisscom ~15%); 2) a compelling risk-adjusted return for Iliad's Italian venture; 3) Significant cash-cost
synergies for VIP-Hutch JV (VIP guided for >€5bn when the JV was first announced).