ZURICH Swiss telecoms group Swisscom SCMN.VX has proposed a 3.7 billion euro ($4.9 billion) friendly takeover of Italian broadband operator Fastweb FWB.MI, in a bid to break out from its stagnant home market.
State-controlled Swisscom said on Monday it would offer 47 euros per share for Fastweb, a 19 percent premium to its price on Friday, before takeover rumors pushed it sharply higher.
But Fastweb shares leaped over the offer price to a high of 49.06 euros on speculation of a counterbid. Swisscom shares fell sharply as some analysts called the offer expensive.
Fastweb's board welcomed the bid and urged Swisscom to make the offer as soon as possible. The company's chairman and large shareholder Silvio Scaglia said he was ready to hand over his 18.75 percent stake unless a better offer emerged.
Sources close to Vodafone (VOD.L) and Sky Italia NWS.N told Reuters they were unlikely to launch counterbids for Italy's number-two fixed-line telecoms operator.
"Although the offer is friendly, the market is betting on other operators possibly jumping into the game," said a Milan-based trader.
The bid is the first major foray abroad for Swisscom since the government imposed restrictions on foreign purchases in 2005, blocking its play for Ireland's Eircom.
"The business is strategically meaningful and opens new growth opportunities for Swisscom," the Swiss government said.
A Fastweb takeover would help strengthen the former monopoly's profile with the latest optic-fibre, voice and broadband technologies, and add rising income from neighboring Italy to its stagnant domestic revenues.
It would also see yet another Italian telecom firm pass into foreign hands.
Swisscom said the deal was contingent on obtaining more than 50 percent of Fastweb. Swisscom would fund the deal via debt and by placing up to 4.9 million shares it holds.
END TO BUYBACKS
Swisscom Chief Executive Carsten Schloter said Fastweb would remain independent. "We won't centralize any kind of function. We will continue to invest in Italy," he said.
Once the deal was completed, Swisscom would change its payout policy, ending share buybacks, with the exception of the 500 million franc buyback planned for 2008. After that, it would pay dividends amounting to about half of net income.
Swisscom said the deal would start boosting the combined group's earnings per share starting in 2009 and would boost revenues and core earnings before interest, tax, depreciation and amortization (EBITDA) by about a fifth.
Swisscom shares eased 3.2 percent to 444 francs on concern about the deal price and changes to dividend and buyback plans.
"We think that the changes in the payout policy might hurt Swisscom's share price over ... coming weeks," analysts at Germany's WestLB said in a note to clients.
Other analysts thought the offer expensive, one saying it valued Fastweb's equity and debt (enterprise value) at about 10 times forecast EBITDA, compared with around 9 times for peers and 7.5 times for the wider European telecoms sector.
Alternative carriers across Europe such as Fastweb, Iliad and Neuf Cegetel in France trade at higher multiples than incumbent operators, due to greater consolidation prospects.
Fastweb, which aims to make a profit this year for the first time since it was founded in 1999, had 30 percent growth in revenues and a 39 percent increase in gross profit last year.
Shares in the company rose nearly 7 percent on Friday and were up 14.6 percent at 48.17 euros at 1450 GMT on Monday.
Fastweb is seen as well positioned to profit from growth in the Italian telecom market, especially for business customers.
The company had 1.06 million customers at the end of 2006, up 49 percent from a year earlier. It has a 13 percent market share of Italy's broadband market, 2 points more than last year, second to Telecom Italia's (TLIT.MI) 67 percent share.
Fastweb has won national contracts, including one from Italy's largest bank UniCredit (CRDI.MI), since expanding its network to cover most of the country, increasing pressure on Telecom Italia, Italy's dominant telecoms operator.
If successful, Swisscom would join a list of foreign operators to enter the Italian market in recent years.
Fixed-line and mobile operator Wind is owned by Egyptian businessman Naguib Sawiris, who bought it from utility Enel (ENEI.MI). It has about 19 percent of the mobile market.
Vodafone and Hutchison Whampoa Ltd's 0013.HK 3Italia also compete in the mobile business, while Cagliari-based Tiscali (TIS.MI) runs broadband and Internet services.
Swisscom is expected to report a 22 percent drop in net profit when it unveils 2006 results on Tuesday, according to a Reuters poll of analysts, hit by rising competition at home.
(Additional reporting by Jo Winterbottom, Andrea Mandala and Mathias Wildt in Milan and Santosh Menon in London)