Speculation that Telefonica is set for a merger with Telecom Italia refuses to go away, suggesting that a deal is being seriously considered.
A tie-up between the two European giants would make great sense from an operational and cost-saving perspective…
Speculation that Telefonica is set for a merger with Telecom Italia refuses to go away, suggesting that a deal is being seriously considered.
A tie-up between the two European giants would make great sense from an operational and cost-saving perspective but there remains a host of obstacles to be overcome if any deal is to transpire.
Although no banks are thought to have been mandated yet, there is undoubtedly work going on behind the scenes in a bid to ascertain the feasibility of a deal.
“To the best of my knowledge I don’t think that anyone has been appointed as advisers yet. But the level of speculation suggests that the deal could for the first time be contemplated by the Italians, whereas before we wouldn’t have considered it possible,” said a banker from a leading international bank.
In the event of any process it is unclear whether Telefonica would be looking to buy out its fellow shareholders in Telco, the holding company that controls around 24% of Telecom Italia, or whether it would pursue an outright merger.
“Putting the obstacles of price and regulatory and political issues to one side, the most suitable structure would be a merger through a share offer, if that were possible. If that were to happen, however, Telefonica would be advised to also have a deal with Portugal Telecom agreed, to buy Vivo in Brazil,” said another banker.
Indeed the Brazilian assets belonging to both Telefonica and Telecom Italia could be a major factor in any deal, were it to get off the ground in the first place.
Telefonica and Portugal Telecom each own 50% in mobile operator Vivo, Brazil’s largest mobile phone company, and there has been talk that Telefonica could sell its stake to Portugal Telecom, which could subsequently look to partner with fellow mobile operator Oi. Telefonica also owns fixed-line operator Telesp, while Telecom Italia owns 86% of TIM Brasil, the third largest mobile operator on the market.
“The key would be solving Brazil, where there is a lot of debt and headaches,” observed one source.
The antitrust officials in Brazil would be likely to step in if the European incumbents looked to bring together the country’s largest and third largest mobile operators. The valuation of the respective operators could also be a sticking point, as TIM Brasil would be valued higher than Telefonica’s stake in Vivo.
If Telefonica were to buy out Telco, then it would be likely to try to force the acquisition of TIM Brasil.
The alternative would of course be to attempt an outright merger, with Telefonica taking control of Telecom Italia. This has long since been considered a logical deal but the obvious stumbling block of political approval could remain an issue.
Earlier this month, Telecom Italia’s core shareholders issued a statement quashing the speculation that they would create a new holding company to enable a merger with its Spanish counterpart.
Reports had suggested that Mediobanca was leading the plans to instigate a new holding company for the 22.5% stake currently held by Telco. In a joint statement Mediobanca, Intesa Sanpaolo and Generali SpA said that the news was ‘entirely without foundation’.
Along with Telefonica, the three companies currently house their combined Telecom Italia stake in Telco.
While Telefonica clearly seems open to a deal the stance of the Italian government will be fundamental to the outcome of any negotiations. The prospect of job cuts and the loss of control of a substantial national asset may yet be considered too big a price to pay.
