Telefonica set to leave deal with Telecom Italia

Jose Castro – Fourth Estate Cooperative Contributor

Madrid, Spain (4E) – Once the purchase of GVT is completed with Vivendi, the next move for Telefonica is to exit the agreement it had forged with Telecom Italia. This was announced by its chairman Monday, which signifies an end to the Spanish telecoms group’s relationship with the Italian carrier.

The past few weeks have been tense between the two telecoms firms, which culminated in the win by Telefonica over Telecom Italia for the purchase of the Brazilian broadband unit GVT.

Telefonica’s Chairman Cesar Alierta made the announcement during a telecoms conference held in Santander, Spain. He said, “After the GVT operation the message is clear, we don’t want to stay in Telecom Italia.”

For its part, Telecom did not make any comment on the announcement.

The deal between Telefonica and Vivendi for GVT is expected to be completed by 2015. With the purchase, Telefonica would be cornering a third of the Brazilian broadband market. The choice came down to the Spanish firm’s bid as the offer ‘best meets’ its strategic and financial goals of the French conglomerate. Also part of the deal is the partnership between the two, where Vivendi would offer Telefonica’s services throughout each of the party’s own networks worldwide.

In a statement, Vivendi said, “The agreement between Telefonica and Vivendi would allow the development of joint projects in content and media. In addition, if it so wish, Vivendi could become a shareholder in Telecom Italia by exchanging its Brazilian shares for Italian ones.”

It added, “In the light of the group’s strategy and in the best interest of its shareholders, the supervisory board decided to enter into exclusive negotiations with Telefonica while emphasizing the relevance and quality of the Telecom Italia offer.”

In order to fund the sale, Telefonica Brasil SA would be selling shares of stock in order to fund the EUR4.66 cash portion. Also, Telefonica would keep the GVT’s net debt at around 0.3% of its earnings. This would be used as leverage to loan more money to fund the purchase. Alierta said that the shares held would be kept as treasury stock if the market was not able to support the loans needed to fund the purchase.

He added, “We’re worried about financing the GVT deal. Obviously, we can use our treasury stock for certain things… and if markets get hysterical because Russian tanks are entering Ukraine, that’s not our shareholders’ fault.”

The move to exit Telecom Italia is another way of appeasing Brazilian authorities over competition in the wireless market. The Brazilian antitrust agency, CADE had told Telefonica that it has a year and half to divest its interest in Telecom Italia or look for a new partner of Vivo. Last July, European antitrust agencies had approved Telefonica’s pending acquisition of German mobile operator E-Plus.

The Brazilian operations of Telecom Italia have a market of about 73.4 million and earned revenues of EUR7 billion. Vivendi would receive from Telefonica from 5.7% of Telecom Italia or about 8.3% of voting rights.

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