Telecom Italia SpA (TIT)’s discussions with Hutchison Whampoa Ltd. (13) over a proposed merger of their Italian mobile-phone assets have stalled amid disagreements over valuation, according to four people familiar with the matter.
Telecom Italia directors, three months after agreeing to examine a combination with Hutchison’s H3G unit, will probably decide to halt the project at a meeting tomorrow, said two of the people, asking not to be identified because the deliberations are private. Telecom Italia executives intend to focus on spinning off the company’s fixed-line assets, a plan approved by its board at the end of May, they said.
While Telecom Italia could revisit a wireless merger in the future, putting the plan on hold would be a lost chance to consolidate in Europe’s overcrowded mobile-phone industry through a combination of Italy’s biggest and No. 4 carriers. In Ireland, Hutchison last week agreed to acquire Telefonica SA (TEF)’s local unit for as much as $1.1 billion.
“Hutchison’s unrealistic view of the value of the H3G unit combined with the high uncertainty of the regulatory environment and the conditions of structural separation make a deal virtually impossible to negotiate today,” Robin Bienenstock, a London-based analyst at Sanford C Bernstein, said by phone.
Telecom Italia shares fell 1.9 percent to close at 52 cents in Milan, adding to yesterday’s 1.8 percent decline after Bloomberg News reported the deliberations and the planned board meeting. Hutchison lost 0.9 percent to HK$82 in Hong Kong.
In a statement, Telecom Italia said its board will take “an appropriate decision” over Hutchison at a board meeting tomorrow. It didn’t elaborate what the decision would be. Hans Leung, a Hong Kong-based spokesman for Hutchison, declined to comment.
While H3G has a so-called fair value of 1.5 billion euros ($1.9 billion), the lack of clarity on how much of the carrier’s accumulated losses can be used to offset taxes means the price could differ by billions of dollars, a person familiar with the matter said in May.
Franco Bernabe, Telecom Italia’s chief executive officer, told analysts May 9 that reaching an agreement with billionaire Li Ka-Shing’s Hutchison would be “complex” because of regulatory obstacles. Telecom Italia and H3G together control 44.6 percent of Italy’s wireless subscribers based on first-quarter data compiled by the Agcom regulator. Wind SpA and Vodafone Group Plc (VOD) are the other network carriers.
A failed linkup between Telecom Italia and Hutchison wouldn’t be a first. Hutchison held discussions in 2010 over a sale of the business to Telecom Italia, and the talks didn’t result in a deal because of differences in valuation, people with knowledge of the matter said at the time.
Telecom Italia had initially planned to recommend a decision on Hutchison by early June after a month-long “in-depth” review. Board members postponed their ruling at a June 5 meeting. Tomorrow’s gathering is scheduled to take place in Milan.
Some members of a Bernabe-led panel tasked with the review were skeptical about a transaction from the beginning, while leading Telecom Italia shareholder Telefonica was concerned about potential losses in any deal, a person familiar with the matter said in May. A Telefonica spokesman in Madrid declined to comment yesterday.
Telecom Italia board members on May 30 authorized the carrier to spin off its copper and fiber assets into a new company and to hold talks over a sale of a stake in the entity to state lender Cassa Depositi e Prestiti. The assets are valued at about 14 billion euros, a person familiar with the matter has said.
Bernabe told a parliamentary panel in Rome today that the separation can only proceed after a “clear regulatory framework” is created. Cassa Depositi is free to invest in the spun-off company “at market conditions,” though Telecom Italia isn’t seeking state intervention in the project.
Even though Italy’s government no longer owns a stake in the company, fixed-line assets are considered strategic by the state. Telefonica is the biggest investor in Telco SpA, which owns almost 22.5 percent of Telecom Italia. Other Telco shareholders are Assicurazioni Generali SpA (G), Intesa Sanpaolo SpA (ISP) and investment bank Mediobanca SpA. (MB) Telefonica, Spain’s biggest carrier, competes with Telecom Italia in Latin America.
Mediobanca said last month it intends to exit from Telco’s investor agreement and sell its 2.6 percent holding in Telecom Italia within three years.
“Telecom Italia is still finding it hard to cope with its pile of debt, which is forcing management to consider things that would otherwise be totally unthinkable,” said Andres Bolumburu, an analyst at Banco de Sabadell SA (SAB), referring to Telecom Italia’s 28.8 billion-euro net debt at the end of March. “If the situation worsens, Telecom Italia could end up selling precious assets such as Argentina or Brazil.”
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