TI-A Telecom Italia

[phil_Buffett]

whats the exact market cap of Telecom italia? i dont find exact figures. the normal stock is around 12b. euros and the saving stock around 4b. euros. so only 16b. euro market cap today?

[Packer16]

I impute about $16b from the savings shares.

 

Packer

[phil_Buffett]

I impute about $16b from the savings shares.

 

Packer

 

ok thank you packer.  :)

[gary17]

So 16b vs 54b,,,, seems like a good safety margin.

 

packer, I'm wondering if you know if other institution value investors have taken a large position in this ...  Their website has a fraction break down but doesn't get into the specifics.

 

Also, do you like the management?

 

Thanks !!

[gary17]

Thanks for the idea...... I bought some today.....  Just looking at Bell (BCE) in Canada and seems similar to Telecom Italia - but BCE is trading at 7x ebitda  with a 37% margin  while TI is cheaper at has 39% margin...  better than gncma even... interesting          gary

[PJM]

I impute about $16b from the savings shares.

 

Packer

 

Packer - Isnt the mcap 16b euros and not dollars?

 

Also on your $54b mcap estimate, are you using multiple of 6.2x EV/EBITDA? The current EV/EBITDA multiples for European telecoms is much lower than that, so any reason to estimate a higher multiple for Telecom Italia? There will be a reduction of almost 1b euro EBITDA after the sale of their argentine unit. Using 5x on estimated 2014 EBITDA of 10b euro gives a mcap of around 22b, almost a 40% upside from current prices.

 

 

 

 

[Packer16]

Total shares outstanding is 19.334bn the ADRs are 10:1 so 1.9344bn ADR equivalents.  So implied value based upon last closing of savings shares is $17.3bn.

 

Packer

[PJM]

Ok, i guess the discrepancy because you are taking total shares and using savings share price which is lower.

 

I took the data from TI website. Ordinary shares Mcap 11.4b euro and savings shares mcap 3.9b

http://www.telecomitalia.com/tit/en/investors/ti-group-shares/shares/telecom-italia-shares.html

 

What would you suggest is the right multiple on forward EV/EBITDA for TI?

[phil_Buffett]

anyone still invested?

 

the stock is up a lot. now bollore(vivendi) is buying more and more Shares and also a new activist with Mr Niel from France Illiad bought a big stake.

[Guest ajc]

 

German activist fund takes stake and supports Elliott plans.

https://www.reuters.com/article/us-telecomitalia-vivendi-board/activist-fund-svm-takes-stake-in-italys-tim-backs-elliott-idUSKBN1HL0UC

 

The Elliott turnaround presentation:

https://www.transformingtim.com/media/1047/tim_presentation_20180409-final.pdf

 

 

 

[Guest ajc]

 

A few updates:

 

 

- Elliott won the shareholder vote and gets to appoint 10 new board members. Vivendi still has the 5 others, but one is the CEO, Amos Genish, so really it's not quite 5. The share price hasn't moved much, even though this is potentially a massive change.

 

- Elliott won the vote by a few percentage points overall, but if you consider that Vivendi voted 25% of the company in favor of their slate, it was actually a total landslide. Reports are that institutions (Blackrock, etc) all actively supported Elliott, as did the Italian government with their 5% stake.

 

- The Italian government vote is noteable, since they're supposedly in favor of the spin-off that Elliott wants. That spin-off would unlock an estimated 7B euros of value from a 17B euro company.

 

- The best way to play this might be through the savings shares (TITR.M, which I own), which are non-voting but with a fat dividend, and that trade at a 13% discount to the normal shares. Converting those shares to normal shares was one of Elliott's main priorities and now that the board is on their side, this seems like it could be one of the first things that gets dealt with.

 

- Besides that discount perhaps being closed relatively soon, Elliott sees 100% upside for the stock over the next two years (see presentation below), if their proposals and the spin-off are carried out. As I said above, all major holders except Vivendi seem to be in favor of Elliott's plan.

 

- As far as Vivendi goes, it's worth saying that Vincent Bollore (chairman of Bollore Group, Vivendi's owner) is facing corruption charges right now. It's open to debate whether he'll be able to fight off Elliott's proposals while at the same time trying to stay out of court, or even jail, on bribery charges. This could obviously help Elliott push through their reforms with less opposition.

 

 

 

Reposting of the Elliott presentation from above:

https://www.transformingtim.com/media/1047/tim_presentation_20180409-final.pdf

 

 

 

[Guest ajc]

 

Also, according to the Elliott slides (above) and this 5-min Peters MacGregor investor presentation, Telecom Italia has basically finished all their major network upgrade capex and FCF should improve significantly from now. So, the timing's good.

 

 

 

 

[Guest ajc]

 

One more thing.... COBF board member, Packer, shared his analysis and reasons for owning Telecom Italia in his most recent partner letter (page 3).

 

He owns the stock in his Bonhoeffer Fund.

 

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/2249ec23-e80d-46a8-9f65-846264852383/0418__BCM_Partner_Letter_Q1_2018.pdf

 

 

 

[ebdem]

Thanks for the update. Very helpful!

I like the case, as TIM has finished a period of intense investing, the markets in Italia and Brazil are turning and there is a lot of value. Hopefully there is a cooperation of Elliott and Vivendi as the dust settles. I think both are heading in the right direction.

[LightWhale]

How do you guys get comfortable with OpenFiber/Infratel and Iliad possibly eroding margins both in broadband and mobile traffic? The Italian telco industry had exhibited irrational competition before the latest round of consolidation.

Thanks.

[ebdem]

Hey, thanks for the questions!

 

On Iliad: The Italian market is already very competitive. TIM was the only player to have the power to invest in 4G. There was fusion between Vodafone and Wind (I think), too. They needed scale to invest. Iliad was successful in France. Yes. But the ARPU was - I think - twice as high as the current state in Italia. TIM has an ARPU of 13 € and the ARPU in France was around 20 € or higher. So there the space for Iliad is small. And there is a special law in Italia: If you want to buy a SIM card you have to go to a store and show your passport. They have to check it. So you need this infrastructure to operate in the market.

 

On Open Fiber/Infratel: There is more competition on paper, but have you checked how the competitors developed? They seem to progress very slowly.

[Spekulatius]

The biggest concern with respect to their fixed line businessis probably not Infratel, but they they will be required to open up their network for competitors in the end, especially if they would be a virtual monopoly.

 

Telecom and media regulation in Europe tends to be more customer than investor friendly.

[Sunrider]

The biggest concern with respect to their fixed line businessis probably not Infratel, but they they will be required to open up their network for competitors in the end, especially if they would be a virtual monopoly.

 

Telecom and media regulation in Europe tends to be more customer than investor friendly.

 

That is, unless they spin-off the network, as Elliot proposed.  :o

[Guest ajc]

 

Ebdem makes some good points about how the value of Italian and Brazilian companies are generally nearer the lower end of the valuation spectrum right now. Also, his insights about the Italian market are very interesting.

Currently, almost all the vectors are pointing in a positive direction for Telecom Italia and there are numerous, obvious levers they can pull.

They've also done all their expensive capex, so competitors would be doing all the bleeding in a price war.

 

If a price war did happen, with the proposed conversion of the savings shares I own (TITR.M, trading at a 13% discount to the regular ones and paying a big dividend) as well as the proposed spin-off of the network, the downside is likely to be limited.

On the other hand, if there's no price war the potential upside is big even if only half the proposed activist measures end up getting done.

 

Amos Genish was retained as CEO today. He has the full support of both Elliott and Vivendi.

He previously built a $9B Brazilian telecoms company, GVT, from scratch. Before that, he was a captain in the Israeli army and the CFO and CEO of a Nasdaq-listed tech company. Haaretz wrote a good profile of him a few years ago (https://www.haaretz.com/israel-news/business/.premium-the-israeli-who-built-a-brazilian-empire-1.5322449).

By all accounts, Telecom Italia has a talented CEO who knows the industry, understands value creation, and is very smart about operational efficiency.

 

Additionally, Goldman and Credit Suisse have apparently been hired to handle the spin-off of Telecom Italia's network. A story from Reuters reported this in February 2018 (https://www.reuters.com/article/us-telecom-italia-network-m-a-exclusive/exclusive-telecom-italia-picks-goldman-and-credit-suisse-for-network-spin-off-sources-idUSKCN1G62YE). The same story states that Berlusconi's political bloc is in favor of co-operation or an eventual merger between Telecom Italia and Open Fiber.

 

There's also a lot of motivation for Vincent Bollore not to interfere with Elliott and the new board. He's facing corruption charges in France over his Africa dealings. At the same time, Telecom Italia has awarded contracts to other Bollore companies (eg. Havas), which allegedly might've been unfairly done.

If he wants to avoid investigation by the Italian government (which voted in favor of Elliott), my guess is he needs to keep a low profile here and let the new board do their thing.

 

Finally, based on Elliott's statement after they won control of the board the other day (https://www.businesswire.com/news/home/20180504005401/en/Elliott-Advisors-UK-Limited-Statement-Telecom-Italia), I'd say none of their original objectives have changed and they'll push for all their value creation measures over the next year or two.

I think they softened their approach in the lead up to the vote because they wanted the moderates on board, but now the fight is over there's a good chance they'll revert to their initial strategy.

 

 

 

[Guest ajc]

 

How do you guys get comfortable with OpenFiber/Infratel and Iliad possibly eroding margins both in broadband and mobile traffic?

The Italian telco industry had exhibited irrational competition before the latest round of consolidation.

Thanks.

 

 

Lightwhale,

I'd be interested to hear your thoughts on how you'd weigh Iliad, irrational competition, etc, here.

Thanks.

 

 

 

[LightWhale]

Thanks for your insights.

 

Lightwhale,

I'd be interested to hear your thoughts on how you'd weigh Iliad, irrational competition, etc, here.

 

I don’t know.

Mobile services + smartphone sales are 37% of TI's revenue.  Italy’s mobile churn rate is the highest in the EU (TI mobile’s churn is, I think, ~25%). That’s fertile ground for a fourth operator to step into.  It could cause both losing many customers and eroding APRU for the remainders.  And for all we’ve seen, there isn’t room for 4 profitable operators in Italy.

 

[Sunrider]

But isn't ARPU already pretty darn low ... i.e. nowhere near France when Iliad leveraged its internet bundle into a hook and combined it with much lower prices for mobile?

 

Thanks for your insights.

 

Lightwhale,

I'd be interested to hear your thoughts on how you'd weigh Iliad, irrational competition, etc, here.

 

I don’t know.

Mobile services + smartphone sales are 37% of TI's revenue.  Italy’s mobile churn rate is the highest in the EU (TI mobile’s churn is, I think, ~25%). That’s fertile ground for a fourth operator to step into.  It could cause both losing many customers and eroding APRU for the remainders.  And for all we’ve seen, there isn’t room for 4 profitable operators in Italy.

[ebdem]

As I already said: they can't replicate their french model. And you have to sell SIM cards personally in stores.

[LightWhale]

But isn't ARPU already pretty darn low ... i.e. nowhere near France when Iliad leveraged its internet bundle into a hook and combined it with much lower prices for mobile?

 

It was lower with 4 operators – 11.3 in q1/2015.

 

And you have to sell SIM cards personally in stores.

 

The SIM argument can be interpreted in two ways:

 

1. Harder to reach clients – It will certainly slow Iliad down, but the Italian market is mostly prepaid, causing high churn (TI’s 2017 churn is 26.2%). So, that does not stop the Italians from changing operators.

 

2. Costlier to reach clients – distribution expenses will be higher than in France, since Iliad will have to either open own stores or pay the Tabacchi Shops. So it hurts their ability to lower prices. But in other ways the Italian launch is cheaper. For instance, the roaming contract with Orange was ridiculously expensive, compared to the present deal with Tre/Wind.

 

As I already said: they can't replicate their french model.

 

Not sure Iliad needs to replicate the French model. They just need some model, and they have one with positive NPV, otherwise they wouldn’t bother. 

 

In France, after 3-4 years Iliad had 16%-20% market share. Since Italy is harder, let’s takes 8%, won evenly from current players. and the market goes back to q1/2015 APRU of 11.3.  On TI’s current numbers that equals a mobile revenue decline of 17%. 

 

What are reasonable sensitivity numbers in your opinion?

[Guest ajc]

 

But isn't ARPU already pretty darn low ... i.e. nowhere near France when Iliad leveraged its internet bundle into a hook and combined it with much lower prices for mobile?

 

It was lower with 4 operators – 11.3 in q1/2015.

 

And you have to sell SIM cards personally in stores.

 

The SIM argument can be interpreted in two ways:

 

1. Harder to reach clients – It will certainly slow Iliad down, but the Italian market is mostly prepaid, causing high churn (TI’s 2017 churn is 26.2%). So, that does not stop the Italians from changing operators.

 

2. Costlier to reach clients – distribution expenses will be higher than in France, since Iliad will have to either open own stores or pay the Tabacchi Shops. So it hurts their ability to lower prices. But in other ways the Italian launch is cheaper. For instance, the roaming contract with Orange was ridiculously expensive, compared to the present deal with Tre/Wind.

 

As I already said: they can't replicate their french model.

 

Not sure Iliad needs to replicate the French model. They just need some model, and they have one with positive NPV, otherwise they wouldn’t bother. 

 

In France, after 3-4 years Iliad had 16%-20% market share. Since Italy is harder, let’s takes 8%, won evenly from current players. and the market goes back to q1/2015 APRU of 11.3.  On TI’s current numbers that equals a mobile revenue decline of 17%. 

 

What are reasonable sensitivity numbers in your opinion?

 

 

Thanks, LightWhale. I think my stupidity and enthusiasm got the better of me here. Most of your points have been on the money, and clearly there's greater potential downside. That'll teach me to go outside my area. Anyway, I've had a toe-hold in the savings shares until now, but based on this I'll likely exit sometime soon. The schooling's appreciated.