We all know the strong changes that Internet has brought to our everyday lives; the way people are connected and communicate has changed dramatically over the past years. Phone calls and standard text messages are becoming less and less popular, as alternative communication services and apps like WhatsApp or Messenger take over. Customers’ demand has changed and supply has had to adapt – new trends strongly affected telecom markets all over the world including the Italian one.
In this article we will first provide an overview of the current trends in the telecommunication market in Italy, we will then focus more in detail on two of the hottest deals that have been shaping the industry recently:
- The Joint Venture between Wind and 3 Italia
- Vivendi increasing its stake in Telecom Italia
Finally, we will introduce Enel’s new project and its potential disruptive effect in the broadband market.
Italian telecom market overview
The Telecom (Tlc) market accounted for €34bn in 2014, which represents around 2% of the Italian GDP, almost equally split between fixed and mobile telephony.
Telecommunication prices declined sharply in recent years: the following graph compares the CPI Index with the average price of telecommunication services.
In order to understand the drivers of this rapid decline in prices, it is useful to analyse how the revenue decomposition of Tlc companies has changed in the recent past. Revenues coming from voice telephony have been declining rapidly, while the ones coming from data traffic have been increasing but not enough to offset the declining path of the voice revenues. The dynamic is quite similar both for mobile and fixed telephony.
Among fixed telecommunications, it is possible to see a significant decline in voice revenues due to the reduction in rates and the progressive shift of voice traffic to mobile. Many of the fixed operators have dealt with this new challenge by offering more integrated services (Broadband, voice and other services) replacing voice services with more value added contents based on the Internet protocol.
For what concerns mobile telecommunication, revenues from traditional service components as voice and messaging, heavily impacted by the strong competition of communication apps, continued to decline in the recent years. On the other hand, Mobile Broadband has been growing and, although yet unable to offset the drop in revenues from traditional services, it represents the main strategic and business opportunity for the mobile Tlc industry.
In other words, Tlc companies have had to move away from their extremely profitable voice and messages services, cutting prices and slushing margins – while entering a new, more competitive and lesser profitable market: traffic data; in order to keep generating revenues. Whit such a difficult environment for organic growth, it is not surprising that the main industry players are trying to sustain margins by realizing cost synergies also through mergers and acquisitions.
M&A opportunities: Wind and 3 Italia
In August 2015, the parent companies of the third and the fourth largest mobile operators in Italy, VimpelCom Ltd. (Wind) and CK Hutchison Holdings Ltd. (3 Italia), announced the agreement to form a 50/50 joint-venture, which will become the major player of mobile telecommunication industry with a market share of 33.5% in terms of customers, followed by Telecom Italia (32.3%) and Vodafone Italy (27%). The new company is expected to generate €6.4bn of revenues and an operating profit of more than €2bn and will be run by Maximo Ibarra, currently the CEO of Wind. Hutchinson’s move needs to be contextualized in its overall strategy: the company already acquired other mobile carriers in Ireland, Austria and the UK, trying to become one of the major players of the European mobile telecommunication industry.
Given the substantial reduction of players involved in the market, the deal is subject to the approval of the European Competition Authority, expected to release a judgment about the feasibility of the deal within May 2016. Even though the same commission has recently rejected the merger between the second and the third Danish mobile operators, there is optimism about the final decision as the number of significant players in the Italian market will eventually be three and not two, as there would have been in the Danish market.
The deal will have two major implications for the market. Firstly, it is expected to generate an overall amount of €5bn of synergies, mainly driven by operating cost savings and reduction of the capital expenditure. This would allow the new operator to be more aggressive in terms of pricing, trying to further increase its customer market share. The second important point is that the merger could be the first step towards a broader consolidation of the industry in terms of potential convergence between mobile and fixed telephony. In other European markets the consolidation has led the players to offer more integrated services including mobile, fixed telephony and, in some cases, even pay-tv services.
A Potential Takeover? – Telecom Italia’s case
The most important websites and newspapers all over the world have drawn quite a lot of attention on Telecom Italia in the past couple of months. The company has been facing many problems ever since its privatization in 1997, and is now dealing with the consequences of the recent financial crisis and recession. With a steadily declining EBITDA over the last 5 years, Telecom Italia is one of the best examples of a European company with good profitability prospects (because of the strategic assets it owns) but still troubled due to the recession and unable to find a way out of the tunnel. In other words, Telecom Italia today is cheap and needs both fresh capital injections and an internal reorganization. This makes it an interesting target for strategic and financial acquirers looking to buy low and restructure the company, namely Vivendi and Xavier Niel.
Vivendi SA is a Paris-based multinational company operating in the content and media sector, focusing primarily on digital entertainment. The company acquired its first stake in Telecom Italia as a result of a deal with Telefonica SA, then increased its holdings to almost 20% through purchases made in recent months. Vivendi has recently asked to add 4 of its highest executives to Telecom Italia’s board. The proposal would increase the company’s influence on Telecom Italia’s governance, and must be interpreted in light of an Italian provision that obliges any acquirer who has exceeded the 25% ownership threshold to make a bid on all of a target’s shares. It is likely that Vivendi wants to avoid the risky and expensive full takeover offer, and is looking for alternative paths to gain control. Telecom Italia’s infrastructure and customer base could strategically justify the acquisition, though the shadow of an opportunistic investment is just around the corner. Vivendi’s objective could be to secure a good stake now in order to be a player in the future, under the perspective of further consolidation in the European telecom industry.
In the meantime, another big player has stepped in. French billionaire Xavier Niel, founder of broadband provider Iliad SA, currently owns options on Telecom Italia for a total of 15.1% of the company’s capital. Once exercised, these securities could reward Niel with about 10% of Telecom Italia’s voting shares. Nevertheless, both Vivendi and Niel have repeatedly reassured that their actions are not coordinated, even though their combined stake could effectively add up to at least 30% of Telecom Italia’s total capital, giving them great influence over the company.
Enel: a game changer in the broadband market
Finally, on the Internet side, 2015 has seen a new and potentially game changing player making its first steps into the Italian Broadband market. Enel, the €38bn Italian utility giant, has approved the launch of a five-year strategic plan according to which it would be setting up a new venture to help build a national fiber-optic telecoms network using its existing infrastructure. This option has been estimated to be approximately 40% cheaper than laying down a brand-new network. The new subsidiary will be directed by Tommaso Pompei, former CEO of Wind, who has already confirmed that all operators in the Italian market will be offered access to the network in order to distribute broadband services.
Enel’s venture comes just at the perfect time. Earlier this year, the Italian government announced a €12bn investment plan to improve the national broadband network, lifting Italy from the bottom of the European ranking for broadband infrastructures. As a result, Enel, committed to install 33 million smart meters of fiber-optic over the next four years, will largely benefit from government’s financing. Furthermore, the capital of the new company will be open to all operators, with Vodafone and Wind having already confirmed that they are prepared to join forces with Enel, while Fastweb and Metroweb may also come on board. It remains to see whether Telecom Italia, the largest Italian broadband distributor, will support the venture.
Earlier this month Francesco Starace, Enel’s CEO stated in an interview that the company is assessing the viability of expanding the plan outside of Italy as well.
Given the magnitude of the project, its effect on prices and on the future distribution of “power” between Enel and the leading operators deserve to be monitored carefully. If successful, Enel’s project is likely to have a dramatic impact on the Italian broadband market allowing a significant proportion of the population to access connections as fast as 100 Mbps.
Conclusion
The dynamics described above result in lower prices, lower margins and higher pressure on operators in the Italian Tlc market. As a response to changing customer demand, operators have shifted their business model towards traffic data and integrated services. Moreover, in order to sustain margins, they are trying to realize cost synergies and to leverage their customer base via consolidation.
The Joint venture between 3 and Wind this year is the latest example of this trend and is set create the largest mobile operator in the market. Separately, Telecom Italia seems to be a favorite target of foreign investors trying to feast on its cheap shares and quality assets. Finally, a watchful eye should be kept on Enel’s broadband venture, which might have the potential to change the balances of the sector.
The telecom market is evolving, becoming more integrated and “European” than ever before, also in view of the abolition, starting in 2017, of roaming charges within the EU territory. Thus, we certainly expect further interesting developments, and hope these will lead to value creation on the side of operators as well as to improved customer experience.
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