The impact of a possible spin-off of Telecom Italia’s (TI, ‘BBB’/Negative) fixed-line network on the company’s credit rating is unclear given different possible outcomes.
Telecom Italia is considering spinning off its fixed network, according to press reports. European Union regulatory changes in the telecommunications sector that could provide operators with an incentive to invest in network upgrades might provide enough visibility to make such a transaction financially and strategically viable.
Assessing the impact on the credit rating of TI, or any other European telecom incumbent, from a spin-off of its fixed network is complex. There are several factors that we would consider:
Control of the network
There is a strategic advantage in controlling the leading network in any geographical area or country. This is even more important as the industry is going through a period of significant technological change and when customer demand for new services is difficult to assess. In Italy, Fitch believes that control of the network is particularly important as there is no infrastructure competition from cable networks.
According to press reports, TI’s CEO Franco Bernabe said that TI would retain control of its network in any spin-off. The European precedent for network separation is when BT Group (‘BBB’/Stable) created its network division Openreach in 2005. BT still owns 100% of Openreach, which manages the UK’s telecommunications infrastructure and treats the rest of BT on the same basis as other operators.
The prices that the network company can charge depend on regulation. A network spin-off is more likely to be attractive if there is certainty on how the network assets will be regulated and the ability to generate a fair rate of return over the long term. A key issue would be how new investments in fibre infrastructure would be treated.
Increased services competition from greater regulatory transparency
A network spin-off would involve operational and financial separation of the network assets from the rest of the company. This could make it easier for a regulator to focus on any economic or operational bottlenecks in how the network infrastructure is used and therefore promote competition. For the telecoms company as a whole, the loss of market share or lower profitability in the retail business units from a potential increase in competition might be compensated by higher returns in the network company.
Possible deleveraging from disposal proceeds
Part of the attraction of a network spin-off would be a possible partial or full disposal, which could lead to deleveraging if proceeds went to paying down debt. The impact on credit metrics would depend on the amount of debt reduction set against any potential negative impact on cashflow from either increased competition or deconsolidation. In the case of TI, if only a small minority stake is sold, potential proceeds may be modest in comparison with TI’s net debt of EUR30.4bn at the end of Q212. TI has set a target to reduce net debt to EUR25bn by the end of 2013.
Damien Chew, CFA
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