Telecom Italia Surges after Getting Green Light to Spin Off Wireline Sector

Jacob Harper  |

It’s been a rough year for Telecom Italia SpA (TI) . The former government telecommunications monopoly has long struggled to get permission to spin off their fixed-line network, which contributes greatly to the company’s $37.6 billion in debt to various creditors. Without a spin-off, the company was doomed to continue to languish.

In mid-July all signs seemed to indicate that the government would make any potential spin-off unfeasible, and Telecom Italia’s shares plunged. Earlier in the month, the company had scuttled plans to merge their wireless division with Huchison Wampoa Ltd. Telecom Italia, quickly running out of options, wanted to focus wholly on the spin-off, which was looking less and less like it would materialize.

But things for the Italian telecom giant might be finally improving. In a surprise move, on July 23 Italy’s telecom regulators gave the go-ahead for a spin-off of their fixed line business. Telecom Italia had previously said the spin-off wouldn’t probably materialize following the regulator's decision to lower wholesale broadband rates. But now the company can move past the "preliminary phase" of the spin-off and start working towards logistics, and in turn generate much needed revenue for the comapny.

Regulators across Europe have been capping the amount telecom companies can charge competitors to access their networks. While it’s not clear exactly how much Telecom Italia would have their access rates capped, speculation was as much as 6 percent. An increase in the cap was certainly going to negatively affect Telecom Italia’s revenue.

Upon finding that the new regulations wouldn’t hinder their ability to sell off the fixed-line division, the company announced they were “ending the preliminary phase of the analysis” and moving forward. If finalized, the fixed line spin-off will inject much needed capital to offset the potential loss in revenue associated with the cap in access charges.

Following the double blow of the scuttled merger and a halting of the spin-off plans, Telecom Italia was in danger of being downgraded to junk status.

It should be noted that the spin-off isn’t a guarantee to happen yet. Italy’s telecommunication regulatory body AgCom still needs to devise a new framework to handle the spin-off. But with the government greenlight, Telecom Italia moves one step away from being downgraded, and one step closer to finally returning to profitability.

Telecom Italia had the best performing large cap stock on the NYSE. Their stock is up 8.97 percent to hit $6.91 a share.

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