Vivendi’s Interest Scrambles Signals on Telecom Italia
Shares in the Italian operator are up 34% this year but the company’s prospects remain murky
Telecom Italia may be riding high but that looks largely fueled by hot air.
Shares in the Italian operator are up 34% this year, the best performer among European telecom incumbents. The latest bump has come from Vivendi raising its stake to 14.9% stake from the 8.2% holding received as part-payment in a separate transaction. Telecom Italia investors may be looking to Vivendi—led by chairman Vincent Bollore—to use its influence to push for balance sheet repair by selling TIM Brazil in exchange for a stronger foothold to distribute its media content in Italy.
The logic seems debatable for both sides. Mr. Bollore has delighted Vivendi’s shareholders by selling off the French company’s telecoms assets, building a cash pile estimated by Morgan Stanley to be around €8 billion ($9 billion) by the end of this year. It isn’t really clear why he is diving back into a troubled sector.
Telecom Italia’s prospects remain murky. The highly indebted company continues to operate at a loss, with revenue dropping by 2.6% year-over-year in the first quarter and earnings before interest, taxes, depreciation and amortization falling by 7.7%. Packages bundling fiber and mobile can increase per customer revenues and reduce churn, but Telecom Italia has had to offer them at sizable discounts to win customers. The prospects for stable revenue growth look precarious at best.
Upping its stake in Telecom Italia could theoretically help Vivendi cement fixed and mobile distribution channels in Italy for its media assets, including pay television Canal Plus. But a large portion of the latter’s content is in French and English, so the appeal to an Italian audience isn’t exactly obvious. Vivendi also doesn’t need to own a stake in the company to establish a distribution partnership.
Alternatively, Vivendi could agitate for change at Telecom Italia while waiting for the Italian telecoms sector to further consolidate, with Hutchison Whampoa reportedly in talks to combine with VimpelCom’s Wind Italy. Telecom Italia’s majority-owned TIM Brazil has been a bugbear: A faltering economy is hurting sales, even as costs swell. But the idea of a sale is hardly new. Selling Brazil would leave Telecom Italia dependent on its stagnant domestic market; the most obvious combination would be with Oi, but potential regulatory resistance and the latter’s high debt levels make that look unlikely for now.
Deal hopes of one kind or another have helped lift Telecom Italia’s valuation: it is trading 40% higher than its average five year Ebitda multiple, and at 6.8 times 2015 Ebitda, its discount to major European incumbent operators has narrowed sharply, according to FactSet. That seems to factor in many “ifs” and not enough “buts”.