Wednesday, 14 November 2018

Telecom Italia’s discount is only partly deserved

Reuters

MILAN: Telecom Italia is caught in a maelstrom of bad news. Its two largest shareholders are engaged in a public slanging match, while nerves about the government’s budget deficit threaten to push up its borrowing costs.

The telco has just agreed to pay a hefty 2.4 billion euros to secure new mobile spectrum in Italy, and also faces slower growth and political uncertainty in its second-biggest market of Brazil. Little wonder that its shares have fallen close to historic lows. Yet the selloff may have gone too far.

The about 30 percent drop in Telecom Italia’s shares this year makes it look cheap. Including net debt, its enterprise value is now just over 35 billion euros.

Subtract the value of Telecom Italia’s listed stakes in is Brazilian unit and tower operator Inwit – and their borrowings – and throw in the 480 million euro down payment for spectrum, and the figure falls to just over 28.5 billion euros.

The domestic business is expected to produce about 6.5 billion euros of EBITDA in 2019, after subtracting forecasts for the two listed affiliates. implying a multiple of 4.4 times. Other European telcos trade on an average of 5.7 times forecast EBITDA for the same year, Refinitiv data shows.

Part of the discount is justified. Telecom Italia’s largest shareholder, Vivendi, has accused rival investor Elliott Management of spreading rumours to undermine Chief Executive Amos Genish. The executive, who was appointed by the French group last year but stayed on after a board overhaul engineered by Elliott in May, admits the situation on the board has become problematic.

Add poor sentiment towards Italian companies amid fears the country’s radical government is undermining the public finances and the picture does not look pretty.

But it may be less bleak than it looks. Rival Iliad’s aggressive push into Italy’s mobile phone market in June seems to have damaged Telecom Italia’s competitors more than the incumbent. Vodafone and Wind have lost a combined 1.7 million contracts to the French player, Genish said earlier in October, adding his group had barely felt the impact.

Company insiders say Telecom Italia had lost just 50,000 net subscribers to the upstart by September. The Italian telco has many headaches, but for now fears that it is suffering from increased competition at home look overblown.

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