Fitch: Oi Deal May Aid Telecom Italia Leverage; Cut Competition
Published on: 3rd Sep 2014
The likely failure of Telecom Italia's bid for Global Village Telecom in Brazil leaves the door open for Grupo Oi to make an offer for the Italian group's stake in TIM Participacoes, Fitch Ratings says. This would reduce Telecom Italia's leverage, which is stretched for the current rating, and would cut the number of major Brazilian mobile operators from four to three, lessening competition.
Telecom Italia earlier this week offered to buy GVT in a cash and shares deal with an enterprise value of around EUR7bn, but at the same time Oi said it had hired an investment bank to examine the possibility of buying Telecom Italia's TIM stake. GVT's owner Vivendi has subsequently opted to enter into exclusive negotiations with Telefonica over an offer with an enterprise value of EUR7.45bn.
TIM remains a strategic asset for Telecom Italia. But we estimate that selling it would, depending on the price achieved, cut leverage on a net debt to EBITDA basis by 0.2-0.4x. Leverage excluding the group's stake in Telecom Argentina, which it already plans to sell, was 2.9x at the end of 2013 and is likely to increase further by the end of this year due to falling EBITDA and weak free cash flow. A sale of TIM might therefore ease near-term pressure given the Negative Outlook on Telecom Italia's 'BBB-' rating. Underlying cash flow would nonetheless need to improve before the company was considered to have a stable credit profile.
The industry consolidation by the sale of TIM, the second largest mobile operator in Brazil, would lead to reduced competition, which could counter the impact of a slowing economy and higher-than-expected cuts to mobile termination rates. It also, however, increases the risk that regulators will block the deal or impose other restrictions. Oi's market position and competitiveness could improve, but its financial profile may come under pressure depending on the deal structure and the company's financing plan.