Hutchison Holding (2CK.F) – market cap. as of 23/09/2016: HKD387bn

VimpelCom Ltd (VIP) – market cap. as of 23/09/2016: $6.17bn

Iliad S.A. (ILD) – market cap. as of 23/09/2016: €10.9bn


On August 6, 2015 CK Hutchison Holdings Ltd. and VimpelCom Ltd. agreed to combine their Italian subsidiaries, 3 Italia and Wind Telecomunicazioni respectively, in a deal valued at €21.8bn, creating a company that would dethrone Telecom Italia SpA as Italy’s largest wireless provider by number of customers.

Italy is Europe’s 4th largest economy and the last major market in the region yet to be consolidated. This transaction, considered as a transformational merger for Italy’s market, required the approval of the European antitrust regulators, which was all but certain as the merger would reduce the number of national wireless carriers from four to three. Regulatory ruling was due by August 18, 2016 but the European Commission extended its deadline to September 8.  On September 1, 2016 the antitrust authorities approved the merger, following VimpelCom and CK Hutchison’s agreement to free up assets in order to help France’s Iliad enter the Italian market as the fourth mobile network operator. The key to secure the European Commission’s approval was indeed an agreement to guarantee fair competition by letting a fourth player enter the market. The €21.8bn deal will give birth to a merged entity with over 31 million mobile customers and 2.8 million fixed line customers, 2.5 million of which are fixed broadband customers. The transaction is expected to complete in Q4 2016.

The existing operators

3 is part of CK Hutchison Holding, a large holding company operating in a very diversified range of markets including port operations and healthcare, with investments in energy, water, transportation infrastructure and finally telecommunications, which only accounts for 5.8% of total revenues. It operates in the Italian market through 3 Italia, the 4th largest mobile carrier in Italy which currently holds a market share of 11% and generated €1.8bn in revenues in FY2015.

The counterparty, VimpelCom Ltd is a Russian company operating in the communications and technology industry. It is the parent company of WIND Telecomunicazioni SpA, which generates €4.4bn of revenues and has a market share of 22.6%.

Iliad S.A.

Founded in 1991 by the French telco mogul Xavier Niel, Iliad S.A. is a Paris-based telecommunication services provider. The company accessed the Internet mass market in 1999 through its fully owned subsidiary – Free. In 2002, Free was the first ISP (Internet Service Provider) to launch ADSL connection at a very low price. In 2007, Iliad also launched Free Mobile, which as of June 2016 was the fourth mobile operator in France, serving 12 million subscribers.

Iliad got listed on the Euronext Paris Stock Exchange in 2004, raising c. €720m during its initial public offering. In FY2015, the company generated a total €4.41bn in revenues (growing 5.9% with respect to FY2014), 62.7% of which from its landline services and the remaining coming from its mobile network operator.

Deal rationale

The rationale behind this joint venture can be clearly identified with the widespread consolidation that the telecom industry has experienced in the recent years.

The combined entity will benefit from economies of scale and from a more efficient cost structure, both needed to exit the stagnation that has been affecting the European mobile operators for a long time now.

The joint venture is expected to generate €6.3bn in revenues (considering 2015 pro forma data) and €700m in annual synergies mainly coming from the lower cost of network and reduction IT expenses. The expected EBITDA (pro forma) will be about €2.5bn, 500m of which will be generated by synergies. The new entity will have a Net Debt/EBITDA ratio of 5x, which is expected to be reduced toward the target of 3x in three years. Additionally, the deal will enhance the debt profile of Wind, whose €9.5bn total debt appeared to be unsustainable on a stand-alone basis.

Together with the significant cost synergies, large benefits will be enjoyed by the two companies and by the Italian market in general. The merger will indeed unlock a €7bn investment in the national digital infrastructure. Furthermore, the 31 million mobile users of the joint venture will benefit from an improved 4G/LTE coverage, with greater speed and reliability. Finally, thanks to the introduction of a fourth operator in the Italian market, the deal will foster stronger competition in the sector.

Deal structure

The companies have recently published data about the total value of the deal, €21.8bn, split between €13.9bn for Wind and €7.9bn for 3 Italia, thus leading to an implied EV/EBITDA multiple of 8.7x and a EV/Sales multiple of 3.4x. Telecoms deals over the last 3 years in Europe concluded with average EV/EBITDA and EV/Sales multiples of 10.8x and 4.1x respectively, therefore the deal seems to be fairly priced (especially if we take into account the impact of capital expenditures in this industry).

However, starting from the enterprise values previously reported, it is possible to compute the implied equity values of the companies involved. Surprisingly, there is a material difference between the two (€8.1bn for 3 Italia vs €4.1bn for Wind), which is not consistent with a 50-50 JV in which usually sponsors contribute with the same amount of equity. This difference, which initially plays in favour of Wind, might be recovered in the “Shotgun Clause” inserted in the agreement. After 2019, each participant can offer its stake to the other shareholder at a pre-specified price. The counterparty must then either accept the offer or buy the offering shares at an agreed price. It is likely that the aforementioned difference in terms of equity value contribution might be reflected in the prices agreed in this clause. Indeed, the price that Wind will have to pay to 3 Italia to acquire its stake must be higher, as Wind initially took advantage of the 50-50 JV, and lower for 3 Italia, which ideally contributed for more than 50% of the equity value of the JV. However, the companies did not disclose similar details of the contract.


The success of this operation lies in the ability of the newly formed joint venture to actually generate the expected cost synergies, thus gaining a cost advantage over its competitors. However, the antitrust authority has forced the two companies to sell assets to Iliad, in order to facilitate its entrance in the market. The French operator, whose pricing strategy is notably very aggressive, might start a price war thus reducing the customer base and the margins of the new-born joint venture, if this does not generate the expected synergies.

This deal represents one of the first steps towards a consolidation of the European telecom industry, not only in terms of geography (see Vivendi-Telecom Italia for example) but also in terms of product range offered to clients. As BSIC outlined in a previous article, all telecom operators are now offering integrated packages which include media contents, broadband, mobile voice and other services. Consequently, it is likely that the market will be completely reshaped over the next years.

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