Telefonica will consolidate its European position with a deal which will give it greater control over Telecom Italia. As Europe continues to battle with recession and market saturation, a wave of M&A is expected among carriers, perhaps luring in outside giants like AT&T and America Movil. That will also see the native majors seeking to strengthen their own bases.
The Spanish incumbent has reached an agreement with its Italian partners in Telco, a vehicle which is the largest shareholder in Telecom Italia. This will allow a gradual takeover of Telco by the operator. The pact was reached at the eleventh hour before the previous shareholder deal expired.
Telefonica will immediately pay €324 million in cash to acquire new non-voting shares in Telco, lifting its stake to 66% from 46%. Its partners, three Italian financial institutions (Assicurazioni Generali, Intesa Sanpaolo and Mediobanca ), remain as minor stakeholders. The first tranche of cash will “immediately reimburse” debt of the same amount due to be repaid in November, the investors said. The Spanish firm will also buy some Telco bonds issued to the owners, paying for them with its own shares.
Telefonica will subsequently pay a second tranche of €117 million, paid for with new Telco shares, assuming it gains regulatory and antitrust clearance. This would raise its stake to 70%. In 2014, it will have the right to convert all its Telco stock into voting shares, giving it majority control of the unit, which in turn owns 22.4% of Telecom Italia. As of January 1 2014, Telefonica will have the option to buy out its Telco partners entirely, in cash, at a rate of €1.10 or the average closing price of Telecom Italia's shares, whichever is higher.
The solution addresses various urgent challenges facing Telco, such as its need for substantial capital to avoid having its credit rating downgraded to junk as well as potential antitrust challenges in Brazil, where Telecom Italia and Telefonica both have mobile operator subsidiaries.
However, telecoms trades unions have raised concerns about the agreement. “This is a very dangerous deal because all the issues of Telecom Italia remain, starting from huge debt and the need for new, real investments,” said Michele Azzola, secretary general of Italy's major telecoms union, SlcCgil, which wants further discussion about “avoiding job cuts and also the sale of TIM Brasil,” whose market value is over $11 billion.
The unions are concerned that Telefonica will use its new power to institute job and cost cutting programs, as it has already done in its debt-ridden Spanish operation.