Vodafone Group CEO Margherita Della Valle recently said the operator is continuing to explore a range of options for its Italian business, which is the last of its three “challenging” markets in Europe.
This week, the France-based Iliad Group offered a solution to the U.K. headquartered group by suggesting the two should merge their respective operations in the Italian market into a 50:50 joint venture.
Iliad is already present in Italy with Iliad Italia and offers both mobile and fiber services. It competes here with the more established operators Telecom Italia (TIM), Vodafone Italy and WindTre. Its offer last year to buy Vodafone Italy for €11.25 billion ($12.355 billion) was swiftly rejected.
As things stand, Vodafone has acknowledged Iliad’s latest offer of a proposed merger and noted that it is supportive of in-market consolidation in countries where it is not achieving appropriate returns on invested capital.
It again confirmed it is exploring options with several parties to achieve this in Italy, including through a merger or a disposal. Indeed, rumors have suggested it is in discussions with Swisscom’s Italian unit Fastweb over a potential deal.
However, Vodafone also warned that there can be “no certainty that any transaction will ultimately be agreed. If required, a further announcement will be made when appropriate.”
Should Vodafone agree to a merger with Iliad in Italy, the move could pave the way for a reduction in the number of mobile network operators from four to three. However, it is by no means certain that the European Commission has softened its stance on in-market mergers.
For instance, the Commission appears to be taking a hard line in Spain over the proposed merger between Orange Spain and Masmovil. Here, the two operators recently agreed to sell spectrum assets to Romania-based Digi Communications in order to secure merger approval. The Commission has subsequently set a date of February 15, 2024 to reach a decision on the deal.
Battle for survival
Iliad itself was able to enter Italy because of the 2016 merger of 3 Italia and Wind to create WindTre. To allow the merger to go ahead, regulators required Wind and Tre to sell assets to allow a fourth operator to enter. Thus, Iliad acquired spectrum and entered as a fourth MNO under Iliad Italia. Since then, Iliad has unleashed a price war on Italy’s mobile market thanks to its low-cost offers.
That in turn has caused considerable problems for the established MNOs, with all three now seeking remedies to put themselves on a firmer footing in the market.
As already noted above, Vodafone is open to all options with regard to its Italian operation. WindTre wants to sell off its network to raise cash and has so far agreed to a deal whereby EQT Infrastructure would acquire a 60% stake in a newly created company that would own and operate its mobile and fixed network. However, that deal also faces hurdles linked to separate network agreements with Iliad and Fastweb, Reuters reported in November.
As for TIM, efforts to carve out and sell its fixed network grid have been ongoing for years. It seems that whenever progress is made, shareholder and/or government opposition causes the whole matter to slow down or grind to a halt.
In October, it had seemed that the plan of TIM CEO Pietro Labriola to separate TIM’s fixed-line network infrastructure (NetCo) from the parts of the company that sell services and deal with customers (ServiceCo) was coming closer to completion.
Investment firm KKR made a binding offer for NetCo, as well as a non-binding offer for TIM’s stake in wholesale operator Sparkle. In November, ahead of the sale to KKR, TIM formally created the organization that would underpin NetCo.
However, the cracks were beginning to show again by December. For one thing, the deadline for submitting a binding offer for Sparkle has been extended to the end of January 2024 to enable Optics Bidco, a subsidiary of KKR, to complete due diligence activities.
Then last week, TIM announced it had received information that Vivendi, which owns 24% of TIM, was challenging the legitimacy of the planned sale of NetCo to KKR and had filed a complaint at a Milan court.
Vivendi has been demanding a shareholder vote on the deal and said the sale was “unlawful.” However, TIM has said the board acted within its rights and confirmed it will continue pressing ahead with its plans to finalize the deal.
Meanwhile, Bloomberg reported that Vivendi is now considering options for its stake in TIM including a sale as part of a wider reorganization of the French group.
All eyes on Vodafone
Turning back to Iliad and Vodafone, Iliad Group has eschewed making a new bid for the entirety of Vodafone Italy, instead offering to create a NewCo that would be 50:50 owned by the two groups, at least initially.
The proposal values Vodafone Italia at €10.45 billion. In addition to its 50% stake, Vodafone would receive a €6.5 billion cash payment and a €2 billion shareholder loan. Iliad Italia would be valued at €4.45 billion and Iliad Group would receive a 50% stake as well as a €500 million cash payment and a €2 billion shareholder loan.
The merged business would be expected to generate revenues of about €5.8 billion and EBITDAaL of about €1.6 billion for the financial year ending March 2024.
It remains to be seen what might happen next, and whether or not Vodafone is able to find a better alternative to Iliad’s offer.