Hong Kong's Hutchison Whampoa has confirmed it is in discussions with VimpelCom about a merger of their Italian operations following weeks of speculation about a possible deal. (See Hutchison's Wind of Change.)
In a statement, the company said it "would like to inform its shareholders and potential investors that it is in exploratory negotiations with VimpelCom on the potential formation of an equal joint venture merging 3 Italia, an indirect subsidiary … in Italy, and Wind Telecomunicazioni, a wholly owned subsidiary of VimpelCom."
A tie-up between 3 Italia and Wind Telecomunicazioni SpA would create a mobile operator serving about 32 million customers, edging it just ahead of incumbent Telecom Italia (TIM) as the country's biggest player, and may be welcomed by rivals for relieving some of the price-based competition in the market.
Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) did not provide further details regarding the discussions but it was reported earlier this week to have reached an agreement with VimpelCom Ltd. (NYSE: VIP) on senior management positions at a combined entity.
According to Bloomberg, Maximo Ibarra, the CEO of Wind, would continue to lead the business following a merger, while Vincenzo Novari, 3 Italia's CEO, would become a board member. (See Eurobites: Bouygues Wants to Go It Alone.)
3 Italia is by far the smaller of the two players, with about 10 million customers next to Wind's 22 million, but Hutchison has already shown a willingness to bulk up its European telecom subsidiaries through M&A activity. (See Li Ka-shing in the Hunt for EU Telcos.)
In the UK, its Three UK business is looking to complete a £10.25 billion (US$16.15 billion) takeover of larger rival Telefónica UK Ltd. (which trades under the O2 brand) that would similarly make it the biggest mobile operator in that market on the basis of customer numbers. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)
In the last couple of years it has also completed takeovers in Austria and Ireland, reducing the number of mobile competitors in each market in the process. (See Three to Acquire O2 Ireland.)
Even so, the latest discussions with VimpelCom might ultimately prove fruitless, warned Hutchison in its statement.
Its wariness is hardly surprising given the failure of previous M&A moves. In 2013, Hutchison called off talks with about a mobile merger with Telecom Italia because of disagreements regarding valuation.
Last year, Hutchison and VimpelCom were said to have abandoned negotiations about an Italian deal after rowing over its terms. Reports at the time suggested 3 wanted a controlling stake in a combined entity while VimpelCom preferred a joint venture.
The "equal joint venture" wording in Hutchison's latest statement indicates it is no longer dead set on being the majority shareholder.
VimpelCom, meanwhile, looks increasingly under pressure to reach an agreement that would help to improve its financial position.
Yesterday, it reported a 30% drop in sales and a 33% fall in EBITDA for the January-to-March quarter as a result of economic and currency-related problems in Russia, its biggest market, and its net debt of $17.6 billion is currently about 1.8 times VimpelCom's market capitalization on the NASDAQ.
After trimming borrowings by $2.4 billion in the recent quarter, VimpelCom yesterday saw its share price rise by 4.5% on the NASDAQ, and a deal with Hutchison could lead to further improvements.
— Iain Morris, , News Editor, Light Reading