Breakingviews: An Olivetti Deal Has Appeal
Edited By Hugo Dixon
Marco Tronchetti Provera faces no dearth of options for reducing debt at Olivetti, the company through which the Pirelli chieftain controls Telecom Italia. Many of them, however, have already been discussed, debated and rejected by his predecessor at the top of the Telecom Italia chain.
Mr. Tronchetti's challenge is to bring Olivetti's 14 billion euro debt load together with the cash-generative businesses of Telecom Italia without losing control of the former telecommunications monopoly.
The best option would be to merge Telecom Italia and Olivetti. But while solving Mr. Tronchetti's debt issue, this would leave Olimpia, through which Pirelli and its partners control Olivetti, with about 6% of the new company, making it vulnerable to a takeover. There is a more appealing alternative for Mr. Tronchetti. He could demerge Telecom Italia's domestic fixed-line telephone business and fold it into Olivetti.
Assuming as part of the deal that Telecom Italia converted its nonvoting savings shares at a rate of 0.75 new ordinary shares for each saver, Olivetti would then hold about 42% of the wire-line company and the Telecom Italia rump, which would include stakes in Telecom Italia Mobile, DataCom, Seat Pagine Gialle and a grab bag of international assets that could be sold. Saddling the spin off with Telecom Italia's 22 billion euro debt, however, leaves the rump enviably debt free.
This alone does not bring the cash- generative bits of Telecom Italia to the Olivetti debt pile. Olivetti would achieve this by offering to merge itself with the remainder of the domestic fixed-line business, which has 7 billion euros of earnings before interest, taxes, depreciation and amortization. The merged entity would have a debt-to-Ebitda ratio of just under five times easing its ability to meet interest payments.
On a multiple of five times Ebitda, subtracting the 22 billion euros of debt, the new company would have an equity value of about 13 billion euros. If Olivetti could complete the merger on those terms, its own principal shareholder - Trochetti's Olimpia - would be left with about 18% of the merged entity. While clearly not a majority, that would allow Pirelli to wield effective control, similar to the way Mediobanca directs insurer Generali with a smaller shareholding.
An Olivetti-Telecom Italia wire-line deal does pose several difficulties. The wire-line company's shareholders might demand a big premium for merging with Olivetti. And Telecom Italia bondholders would suffer, as the fixed-line business would be made to service an enlarged debt burden.
The bonds would likely lose their triple-B-plus rating putting them on a par with the rating accorded to Valentia, the vehicle used to acquire Irish Eircom. While bondholders have some protection from a clause that would increase the yield by 50 basis points, they might feel that was insufficient reward for the increased credit risk. Tronchetti might view this a small price to pay. |
