Italy telco deal would open European floodgates

3 minute read

Relay antennas for mobile phone networks are pictured near Gross-Gerau, Germany, April 25, 2019. REUTERS/Ralph Orlowski

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LONDON, Jan 25 (Reuters Breakingviews) - The Italian leg of Iliad’s long journey as a telecoms upstart may be nearing its conclusion. French tycoon Xavier Niel’s local outfit is in merger talks with Britain’s Vodafone (VOD.L) to reduce Italy to a three-player market, Reuters says. Assuming no hectoring from European competition boss Margrethe Vestager, a deal would likely trigger copycat consolidation in Germany, France, Spain and the UK.

Europe’s telecoms bosses frequently grumble about the burden of excessive competition due to Brussels’ preference for more rather than fewer operators. They have a point. China and the United States, both far larger markets than any European country, have just three players. That means their companies are more profitable, leaving them better placed for the hugely expensive rollout of 5G networks and fibreoptic broadband. JPMorgan reckons returns on investment for U.S. operators like AT&T (T.N) and Verizon Communications (VZ.N) are 11%, against just 5% for their counterparts in France and the UK.

Vestager has previously blocked so-called four-to-three deals or imposed punitive terms. However, there are signs of the Dane softening her stance. One is her reference in November to the need for “in-built flexibility” in competition considerations in sectors like telecoms, which proved critical during the pandemic. Another is a 2020 European court ruling that annulled her decision to block a UK industry tieup four years earlier.

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For Vodafone and Iliad, the benefits of a shared destiny are obvious. Combined, the pair’s Italian units would control a 36% market share. Even before factoring in any benefits from enhanced pricing power, they could extract annual cost synergies of perhaps 645 million euros, or 11% of revenue, using the 2016 union of Wind and 3 Italia as a guide. Those would have a present-day value after tax of around 5 billion euros. As a whole the merged group could be worth over 15 billion euros, assuming Vodafone’s 1.8 times sales multiple on its nearly 6 billion euros of revenue.

The absence of a Vestager red light would also shake up other overcrowded European markets like Germany, France or Britain. In those countries, like Italy, the number four operator has a 12% or lower market share, making a merger with the number three player potentially more palatable to Brussels. Iliad’s Italian fate could unleash an M&A epic.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- Vodafone and Iliad are in talks about a possible merger of their Italian telecommunications businesses, Reuters reported on Jan. 22.

- The combined group would control about 36% of Italy’s mobile telecoms market, with total revenue of nearly 6 billion euros.

- Iliad’s Italy boss, Benedetto Levi, said on Jan. 13 the French firm was open to buying a rival. Vodafone Chief Executive Nick Read on Nov. 17 called for consolidation in Europe to help struggling operators, particularly in Spain, Italy and Portugal.

- Vodafone’s London-listed shares gained as much as 6.3% on Jan. 24. Privately owned Iliad and Vodafone both declined to comment.

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Editing by Neil Unmack and Karen Kwok

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