Telecom Italia's Next Deal
Last month, the former Italian monopoly decided to sell its stake in Telecom Argentina (TEO) to the Mexican investor David Martinez for just about $1 billion. Now, the Brazilian antitrust regulator is telling Telefonica to either reduce its investment in Telecom Italia, which controls TIM Brazil, or sell a stake in its Brazilian business, Vivo. The reason is clear. Vivo and TIM Brazil control over half of the country's mobile market. Most probably, the solution will come from Telecom Italia's side. I think the Milan-based company will finally decide to sell TIM Brazil in order to keep reducing its debt pile. That said, is selling TIM Brazil a good thing for Telecom Italia's shareholders?
An Over-Leveraged Business
Even when TIM Brazil represents 26% of Telecom Italia's revenues, the best strategy for the Italian company would be to focus on its troubled home market, which seems to be stabilizing despite the continued weakness at the wire line business – a business that is losing revenues at a 6% year-over-year rate. If the sale of TIM Brazil – which should be worth at least $10 billion – materializes, Telecom Italia would be a leaner organization with more resources to invest in its main market.
On one hand, Telecom Italia's debt, at 26 billion euros – or 3 times 2014 EBITDA – is a huge drag to the company's valuation. Telecom Italia now sells at 14.7% equity free cash flow valuation for 2014, a discount to the sector's range of 6% to 11%. Through selling its 70% stake in TIM Brazil, Telecom Italia could reduce its net debt to a more sustainable level and the company could keep its rating without a potentially harming equity issuance. On the other hand, Telecom Italia could focus its efforts into turning around its local operations. As a matter of fact, the outlook for European telecoms, which has been extremely harsh in the past few years given the stiff price competition among operators, seems to be ameliorating. Hence, it seems reasonable to focus on Europe.
All of the above being said, Telecom Italia's recent press release says: “The company reaffirms the strategic importance for the Group of its shareholding in TIM Brazil and in the Brazilian market, denying that there are any ongoing contacts with potential buyers of the subsidiary, that a sale or combination with other operators are being pursued or that purchase offers have been received, not even unsolicited.”
Despite the company's clear press release, which denies its intentions to sell TIM Brazil, I believe a sale is coming. In addition, I also believe that a sale would be good news for shareholders if the price Telecom Italia can get for its stake in TIM Brazil is a fair one. If Telecom Italia repeats in Brazil what happened in Argentina, where the price Telecom Italia got for its stake in Telecom Argentina was extremely low, then Telecom Italia's shareholders would be hurt again. I think a deal is coming; I just expect this time Telecom Italia's management can negotiate a fair price for its Latin American jewel.