Telecom Italia's Lousy Deal
The one billion Euro offer made by Finitech - according to Telecom Italia's CEO Mr. Patuano - is below what most analysts (including me) had expected. Telecom Argentina, which does not hold any debt (actually, it holds a $900 cash position) and accounts for as much as 14% of Telecom Italia's total top-line, is a wonderful asset. Yes, Telecom Argentina operates in a politically troubled country but, even for an asset in Argentina, a valuation below 4 times EV/EBITDA looks cheap for a company that is doing great from an operational standpoint.
The one billion Euros paid by Finitech would be exchanged for 68% of the voting shares that Telecom Italia holds in Sofora Telecomunicaciones, which controls Nortel Inversora (NYSE:NTL), which respectively controls Telecom Argentina through a 54.7% stake in the company. Its relevant to mention that, during 2011, Telecom Italia bought from its Argentinean partners (the Werthein family) 10% of Sofora's shares in a deal that valued Telecom Argentina at around $5 billion. Therefore, Italy's former telecommunications monopoly is selling at a loss a company which is producing tons of cash and increasing its mobile Average Revenue Per User (ARPU) at a 18.5% year-over-year pace.
Telecom Italia needs cash in order to invest in its home market and reduce its huge debt pile but the deal, if closed at one billion Euros, does not look like a great one. Above all taking into account that the political landscape is about to change in Latin America's third largest economy. Presidential elections are to be held in 2015 and its clear to all political analysts that the administration taking the presidential seat in two years is going to be a businesses friendly one. Maybe Telecom Italia should sell Telecom Argentina but right now does not look like the right time to do so.
There are many things Telecom Italia is planning to do in order to get the four billion Euros it needs. Among them the Italian company plans to sell transmission towers in Italy and Brazil, suspend its $0.21 per ADR annual cash dividend and issue a 1.3 billion Euro bond. Probably, the Italian company should also sell Telecom Argentina and focus its efforts on the other side of the Atlantic ocean but sometimes patience pays incredibly well. Right now its a bad time to sell Argentinean assets. A new administration will surely attract many investors to the country and the price for a company like Telecom Argentina should soar. I believe that Telecom Italia's management should look for cash somewhere else.