Telefonica has agreed a deal with the other shareholders of Telco, Telecom Italia’s controlling shareholder with a 22.4% stake, to increase its interest in the holding company.
Fellow investors Generali, Intesa Sanpaolo and Mediobanca will remain as…
Telefonica has agreed a deal with the other shareholders of Telco, Telecom Italia’s controlling shareholder with a 22.4% stake, to increase its interest in the holding company.
Fellow investors Generali, Intesa Sanpaolo and Mediobanca will remain as partners but the Italian firms’ stakes will be diluted once the Spanish incumbent injects €441m (US$594m) into Telco.
Telefonica will invest the money in two stages. Firstly it will put €323.7m (US$436m) into Telco, taking its stake in Telco to 66% from about 46% at the moment.
However, it will still hold 46.18% voting shares; this is because while it does not compete with Telecom Italia in Europe, both telcos have operations in Brazil and Argentina. As part of the corporate governance of Telco, the Spanish operator is barred from participating in or influencing Telecom Italia’s decision-making in those markets.
Providing Telefonica receives the appropriate regulatory approvals in Latin America, it will then inject a further €117.2m (US$157.8m) into Telco taking its interest up to 70%, with its voting shares remaining at 46.18%.
This values the shares at €1.09 each, almost twice their current value. The total €441m will go towards servicing Telco’s debts.
From 1 January 2014 Telefonica has the option to convert its non-voting shares into voting shares and will be allowed to hold a maximum of 64.9% of the voting capital, subject to regulatory approvals in Brazil and Argentina.
Some analysts believe that Telecom Italia will look to dispose of TIM Brasil in the coming months and that it will be broken up and split between Brazil’s three other large operators, including Telefonica’s Vivo.
Robin Bienenstock, senior analyst at Bernstein Research, said the deal gives Telefonica choices. “This is a good outcome for Telefonica, who can likely wrest control of TIM Brasil from TI through a consortia bid with [fellow Brazilian operators] Oi and AMX,” she said.
“They also keep the option to gain control of TI eventually were that interesting (and we think that there are scenarios in which it would be) and to increase the value of their stake there. The option granted to Telefonica buys them time to construct a consortium bid with PT/Oi and AMX (who we believe is already onboard) without creating antitrust problems in the interim. It also gives them time to sound out Brazilian anti-trust authorities and government channels.”
In the interim Telefonica will have time to further cut its debt by potentially exiting China Unicom and selling its Czech business, which will leave it better positioned for further deals.
Telefonica has also acquired 23.8% of Telco’s non-convertible notes from the Italian investors in exchange for Telefonica treasury shares equating to 0.9% of Telefonica’s share capital. This gives it 70% of the bond issued by Telco for a sum equating to €424m (US$571.8m).
From the start of next year Telefonica has a call option with the other shareholders to acquire all of the shares in Telco. For the meantime it has established a standstill agreement and will not buy Telecom Italia shares unless a third party acquires a 10%-plus stake in the Milan-based operator.
The Telco members had until 28 September to request early exit from their ownership agreement. And in the past few weeks, the Italian institutions were reportedly approached by several internationally-based investors including Egyptian businessman Naguib Sawiris, as well as US incumbent AT&T and Carlos Slim’s Mexico based telco America Movil.
The Italian incumbent, at risk of a debt rating downgrade to junk status, has been striving to cut its net debt – which stood at €28.8bn (US$38.8bn) as of 30 June – to €27bn (US$36.4bn) by the end of the year.
It is planning to spin off its fixed-line network and was linked with a sale of towers last week which could generate €1bn (US$1.3bn).
