Telefonica may have to inch higher for GVT

August 28, 2014

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. 

Telefonica is showing how much it wants to buy GVT. The Spanish telecoms group has given Vivendi a 24-hour deadline to accept a new 7.45 billion euro ($9.8 billion) offer for the French conglomerate’s Brazilian subsidiary. A competing bid from Telecom Italia is 450 million euros lower, has less cash and is more conditional. Still, Vivendi could yet wring more out of this auction.

The Spanish GVT proposal immediately looks more attractive. It comprises 4.7 billion euros of cash plus a stake in its Telefonica Brazil subsidiary worth 2.8 billion euros. About a third of those shares could be exchanged for a 5.7 percent stake in Telecom Italia, in which Telefonica has been a longstanding shareholder.

On standard M&A thinking, Telecom Italia’s fiddly bid has much against it. The proposal has just 1.7 billion euros of cash. The remaining considering consists of a 15 percent stake in TI’s Brazilian unit, TIM Brasil, and a 16 percent stake in Telecom Italia. Unlike Telefonica’s, the offer requires a shareholder vote. To complicate matters further, TIM Brasil is also in play – Oi, Brazil’s biggest fixed-line company, says it is considering buying TI’s stake.

Vivendi says both offers include content deals. Details are scant, but that probably favours Telefonica, which has a larger global footprint than its Italian rival. The best that can be said for Telecom Italia’s proposal is that it offers a large stake in itself, possibly positioning Vivendi nicely for future European telecoms consolidation.

Still, Vivendi would be unwise to rush off with Telefonica. Telecom Italia could still sweeten its bid with more of its own stock. Both sides seem to acknowledge that Telecom Italia shares are seen as an attractive currency by Vivendi Chairman Vincent Bollore. A revised Telecom Italia bid could in turn force a counteroffer from its Spanish peer.

How much higher could Telefonica go? GVT is worth 5.2 billion euros on a standalone basis, equivalent to 7.5 times this year’s EBITDA, say analysts at Kepler Cheuvreux. Telefonica could reap synergies with a present value of about 3.5 billion euros, although that includes a more elusive 1 billion euros of added revenue from cross-selling. On that basis, Telefonica could raise by another 1.2 billion euros without destroying value. It may yet have to pay some of that away to get what it wants.

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