Telecom Italia Tanks on Iliad Mobile Threat

Telecom Italia's share price fell by more than 9% in Milan on Wednesday morning on the news that France's Iliad is poised to enter the Italian telecom market.

The French service provider last night agreed to buy Italian assets that Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) and VimpelCom Ltd. (NYSE: VIP) are selling in advance of a planned merger. (See Wind, 3 Eye Sale of Italian Assets – Report.)

The deal would see Iliad (Euronext: ILD) become Italy's fourth mobile operator following a tie-up between Hutchison's H3G Italy and VimpelCom's Wind Telecomunicazioni SpA subsidiaries and will pile additional pressure on to market leader Telecom Italia (TIM) and rival Vodafone Italy .

Iliad has been widely blamed for starting a price war in France's mobile market after launching operations in 2012, and it seems bound to pursue similar cut-price tactics as it looks to build market share in Italy.

Owned by French billionaire Xavier Niel, the operator described the deal with Hutchison and VimpelCom as a "unique opportunity" to enter a market "stepping up its digital transition."

It plans to capitalize on the experiences it has already gained in France and to carry out investments in Italy over a period of five to seven years, using cash and available facilities.

Iliad ended 2015 with net debts of €1.2 billion ($1.3 billion) -- just 0.8 times its EBITDA that year -- and also had €719 million ($794 million) in available cash and "cash equivalents."

The assets Iliad is set to acquire include a swathe of spectrum in 3G and 4G frequency bands as well as "several thousands" of macro sites in densely populated areas.

Iliad said it would pay €450 million ($497 million) for the frequency licenses, which comprise 2x5MHz of 900MHz spectrum, 2x10MHz in the 1800MHz band, 2x10MHz at 2100MHz and 2x10MHz at 2600MHz. Payments are to be made in phases between 2017 and 2019, said the operator.

While Iliad has an "undertaking" to acquire macro sites offered by H3G/Wind or rented from third parties, it has not said how much it would pay for those assets.

It also has an undertaking either to share radio access networks with H3G/Wind or to acquire more sites in rural parts of the country.

In addition, the players have signed a five-year roaming agreement covering 2G, 3G and 4G technologies. This can be renewed for another five years at Iliad's instigation.

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The entire arrangement, however, is contingent on the approval of the European Commission , which has yet to rubber-stamp the merger between H3G and Wind.

A tie-up would give rise to Italy's biggest mobile operator by customer numbers, giving H3G the market power it has lacked as Italy's smallest player and allowing VimpelCom to reduce debts.

Regulatory authorities have recently opposed mobile mergers in Denmark and the UK that would have left each market with fewer players, and the deal with Iliad is clearly aimed at addressing any competition concerns. (See Eurobites: EU vetoes O2/3 combo.)

Rivals, however, will be concerned the deal with Iliad negates the benefits of market consolidation and that conditions would probably worsen following the arrival of such an aggressive new entrant.

Telecom Italia is arguably in poorer shape than any of western Europe's former state-owned telecom monopolies and already faced a number of competitive, economic and regulatory challenges before news of Iliad's intentions surfaced.

Suffering sales and profitability setbacks last year, the operator appointed a new CEO in the form of Flavio Cattaneo in March after his predecessor Marco Patuano was reported to have clashed over company strategy with main shareholder Vivendi , which holds a 25% stake in Telecom Italia. (See Telecom Italia Names Cattaneo as New CEO.)

Cattaneo is under pressure to accelerate restructuring efforts and may be forced to negotiate a sale of the company's business in Brazil.

He also faces a new broadband challenge from Italian energy group Enel SpA , which has promised to spend €2.5 billion ($2.8 billion) on the deployment of a fiber-to-the-home network that would present a wholesale alternative to Telecom Italia's infrastructure. (See Eurobites: Italy's Enel in $2.8B FTTH Plan.)

Furthermore, Michele Gamberini, the operator's head of core network and infrastructure, admitted at an industry conference earlier this year that Telecom Italia was struggling to carry out a digital transformation of its business. (See Telecom Italia Not Ready to Transform, Admits Exec.)

Iliad owner Niel owns a tiny stake in Telecom Italia worth less than €25 million ($28 million) but has promised to sell this in the next few weeks.

— Iain Morris, , News Editor, Light Reading