Telecom Italia Seeks Friends for 5G Revival

A mobile network-sharing deal with Vodafone, and efforts to combine fixed-line forces with state-backed Open Fiber, are at the heart of a turnaround plan by Telecom Italia that highlights the huge cost and revenue challenges it now faces in the Italian market while its shareholders squabble over control of the business.

The turnaround plan came as the Italian phone incumbent published full-year results that showed a 6% fall in like-for-like EBITDA (earnings before interest, tax, depreciation and amortization) at home, which the company blamed on restructuring activities and the tough market environment.

Along with Vodafone and Wind Tre, it has been hit by the arrival in the mobile market last year of Iliad, a low-cost service provider of French origin that has poached customers from its older rivals. Figures also show that Telecom Italia cut 1,528 jobs last year, around 2.6% of the total group headcount, as it wrestled with the digital transformation of its business.

Overall revenues in 2018 slipped 0.5%, to €19.2 billion ($21.8 billion), while organic earnings came in at €8.1 billion ($9.2 billion), about 3.4% down on the 2017 figure.

Telecom Italia was already one of Europe's most heavily indebted operators, with a net debt of €25.3 billion ($28.7 billion), and this year agreed to pay €2.4 billion ($2.7 billion) for a new set of spectrum licenses that can be used with forthcoming 5G services. The outlay threatens to put further pressure on Telecom Italia's net-debt-to-EBITDA ratio, which exceeded 3.1 last year, as payments become due.

Unlike Germany's Deutsche Telekom, France's Orange and Spain's Telefónica, Telecom Italia made sharp cuts to its capital expenditure last year, investing €4.2 billion ($4.8 billion) -- not including the cost of spectrum licenses -- or nearly 15% less than in 2017. In its statement, the operator said it had already covered 99% of the Italian population with 4G connectivity, and 80% with a fiber network that reaches part of the way to customer homes.

The financials show exactly why Telecom Italia is turning to network partners as it begins to plan its 5G future.

Under a new deal, it will share "active" equipment, which includes the electronics used in mobile networks, with Vodafone's Italian subsidiary, which is under similar financial and competitive pressure after spending heavily during Italy's 5G auction.

Indeed, Vodafone is willing to share active equipment with a rival in Italy even though it is backing out of such arrangements with Telefónica's O2 business in the UK market.

Telecom Italia and Vodafone said the deal would help them speed up the rollout of 5G services and bring cost savings in future. But Kye Prigg, the head of mobile and fixed networks for Vodafone's UK business, previously raised concerns about active network sharing of 5G equipment, which may have to support much higher-speed and lower-latency connections than 4G equipment. In January, Vodafone UK and O2, which have a long-standing network-sharing partnership, said they would start to roll out separate radio equipment at about 2,500 sites, covering 15% of those outside London.

Telecom Italia and Vodafone said they would make upgrades to their respective transmission networks to cope with additional traffic demands. They are also considering whether to extend the active network-sharing deal to their 4G networks.

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But the tie-up goes much further on the "passive" side, which covers masts and other non-electronic gear used in the buildout of mobile networks. Telecom Italia and Vodafone already share about 10,000 sites, or 45% of their total tower footprint, and are now exploring the option of spinning out all 22,000 of their passive towers into a separate entity.

Meanwhile, talks have started with Open Fiber, a government-backed broadband initiative, about partnership options including a "full business combination on fixed network."

Telecom Italia shareholders Vivendi and Elliott have clashed repeatedly over the possibility of spinning off the operator's fixed-line network and then merging this with Open Fiber. Luigi Gubitosi, the operator's current CEO, is pursuing this plan with the backing of Elliott, but faces opposition from Vivendi, Telecom Italia's largest single shareholder.

The Italian operator said it had also received a non-binding offer for Persidera, a TV business, and begun exclusive negotiations with the prospective buyer.

In a downbeat forecast, Telecom Italia said it expected service revenues to fall this year before starting to grow in 2020. Earnings are expected to follow the same pattern. In Italy, it plans to spend about €3 billion ($3.4 billion) in capex annually between 2019 and 2021, down from €3.2 billion ($3.6 billion) last year and nearly €3.9 billion ($4.4 billion) in 2017.

Cost-cutting efforts, it said, are aimed at reducing addressable costs by 8% and will mean consolidating legacy assets, like data centers and exchanges, and directing investments into artificial intelligence.

Telecom Italia's share price received a boost after the publication of the latest strategic plan and was trading up more than 3% in Milan at €0.54 at the time of publication. However, the company's share price is currently trading about 25% below its price from a year ago.

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— Iain Morris, International Editor, Light Reading

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