Talks between Swisscom and Vodafone to sell Italian business for €8bn

Swisscom and Vodafone are in exclusive negotiations to sell their struggling Italian business to each other for €8 billion.

The telecoms group has confirmed that it has held “extensive” talks with “several different parties” in order to consolidate the business in Italy.

It concluded that, after these events, the cash deal with Swisscom was the “best combination of value creation and upfront cash proceeds for Vodafone shareholders”.

Swisscom is acquiring Vodafone Italy at an enterprise value (on a debt-free and cashless basis) of €8 billion, which is a multiple of 7.6 times the company’s forecast adjusted earnings for 2024.

Vodafone announced alongside its third quarter results that it was still in ‘active discussions’ with regards to a deal for the Italian business.

The sale of the company to Swisscom would simplify the FTSE-100 telecoms group, and create Italy’s second biggest fixed-line broadband provider with a strong business presence.

Swisscom’s shares, which are quoted in Zurich, fell by 1.4% last night. The company plans to merge its business with Fastweb italy, a subsidiary. The company said that the acquisition would increase its cash flow and have a “positive impact” on its dividend policy. Vodafone shares were barely changed at 68 1/4p. Shares of Vodafone had increased on Tuesday following a report that suggested Vodafone would likely hold a minor stake in a combined company with Fastweb, if a deal was reached.

In the third quarter of 2011, Vodafone’s service revenue in Italy fell by 1.3%. Vodafone turned down an offer from Iliad to form a joint venture in Italy. Under the deal, Vodafone Italy would have been valued at €10.45 Billion.

Berenberg, an investment bank, stated that Vodafone Italy was valued at €7.75bn on a sum of the parts basis. This means that it represented 13 percent of Vodafone’s overall enterprise value. The investment bank Berenberg said that the additional €250m relative to its model was worth approximately 1p per Vodafone share. After Vodafone rejected Iliad’s offer, it was more likely that a deal would be struck between Swisscom Italy and Vodafone Italy. The market was not expecting a Swisscom acquisition of Vodafone Italy that would lead to a Vodafone departure.

Vodafone agreed last year to merge its UK operations with Three, which is owned by CK Hutchison (the Hong Kong-based conglomerate). The Competition and Markets Authority is currently investigating the merger. The company has also agreed to sell its Spanish business for €5 billion to Zegona Communications (a London-listed investment vehicle).

Vodafone is the largest telecoms group in the world, but its struggles are due to debt, high costs, and fierce competition on several markets. Margherita Della Vale, Vodafone’s former chief financial officer, was appointed chief executive in April last year after Nick Read, its 59-year-old predecessor, struggled. This was due to investors’ frustration over the speed of the overhaul and the consolidations that were made to focus on the core markets of Europe and Africa.

Last week, analysts at Deutsche Bank stated that Swisscom is a “well managed telco” in a “defensive country”. It has a strong balance sheet with a healthy and stable market structure.