Possible consolidation could also help Vodafone
Credit Suisse First Boston’s (CSFB) Equity Research Group has taken the view that the $1.3 billion purchase by Egyptian operator Orascom of a 19% stake in Hutchison Telecom International raises the prospect of consolidation between the third and fourth mobile operators in Italy.
Hutchison Telecom International (HTI) is a subsidiary of Hutchison Whampoa containing the group’s 2G assets. HTI’s owner, Hutchison Whampoa, own 3 Italia in its own right. Orascom’s controlling shareholder, N Sawiris, owns third Italian operator Wind. CSFB said that both Sariwis and Frank Sixt, cfo of Hutchison Whampoa, confirmed there was now scope for co-operation between the operators, but the research company warned that substantive cooperation may require a full merger under the terms of EU anti-truct law.
CSFB has taken the view before that the best prospects for an upside for Vodafone in Europe would be more consolidation between its rival operators. “We calculate that a 3Italia-Wind merger could lift Vodafone FYMar08E eps by 2.4%, although such upside might be smaller if anti-trust approval required mandated access for MVNOs and/or if the combined 3Italia/Wind competed more aggressively,” the bank’s research arm said in a statement.
TIM has come under strong pressure from 3Italia, leading it to aggressive competitive plays. A merger could bring about less competitive disruption, CSFB reasoned, returning stability tothe Italian mobile market, which would be good news for Vodafone.
Considering the rationale for the Orascom-HTL deal, CSFB said it was probably too early to view this as the start of HTL’s exit strategy from 2G in emerging markets, meaning some real cooperation in Italy is more likely.
“Hutchison Whampoa has a track record of selling its mature 2G assets (it sold Orange to Mannesmann in 1999) and with Orascom holding a right-of-first-refusal over the remaining Hutchison Whampoa shares in HTIL, the deal could provide an exit for Hutchison Whampoa,” CSFB said.
“However, with penetration levels in many of HTIL’s markets (not least of which India) relatively low, it would seem early for a long term investor such as Hutchison to sell out. Hutchison may therefore indeed be seeking to co-operate with Orascom over the medium term, raising the real prospect of some kind of agreement in Italy. The timing of this deal, coming ahead of a delayed 3Italia IPO, should also not go unnoticed, although an announcement just before Christmas is not the best time to maximise publicity in the stock market, suggesting the deal has substance.”
CSFB said that neither company’s debt position would necessarily be an obstacle to merger, although relative valuations would be. 3 Italia values itself at a similar level to Wind, with revenues an estimated 35% that of Wind. Antitrusst issues would also be a possible obstacle to merger.