Wind and 3: Italian job

When Guglielmo Marconi invented the wireless radio system no Italians would sponsor him to develop it. Today, a descendent of his invention, mobile telephony, gets too much funding. Competition is excessive.

The number three and four mobile operators in Italy, Wind (owned by Russia's VimpleCom) and 3 (part of HK's Hutchison Whampoa), have maintained market share by keeping prices low. Reducing the number of companies from four to three should reduce price pressure and improve profitability, even at the companies that do not merge - if the hoped-for consolidation ever happens.

While the incumbent Telecom Italia, has hardly flourished, the competition has hit Vodafone, the number two player, hardest. It has lost market share since 2011 to both Wind and 3. The squeeze has hurt profits. Vodafone's Italian earnings before interest, tax, depreciation and amortisation has fallen about 40 per cent over the past three years, according to Citi. Telecom Italia's domestic mobile unit - almost a third of its profits - has fallen by 23 per cent in that time.

Not surprisingly, the market views any hint of a Wind/3 combination favourably, and there are signs that a deal is expected soon. Telecom Italia's discount to its European peers has diminished. Telecom Italia's price/earnings ratio was half that of the MSCI Euro Telecom index at the end of 2013. That discount has been cut in half.

Much depends on Wind's desire for a deal. It carries a lot of leverage. Net debt is six times ebitda. Financial expense has been twice the size of operating profits for the past two years. But Wind recently sold its telecom towers to Spain's Cellnex for nearly €700m. That is double last year's operating profit and must take some pressure off. That means that Wind's parent, VimpleCom, can bargain hard with Hutchison.

Consolidation may come to the Italian market. But not as soon as some would hope.

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