Morningstar | Telecom Italia's Results Under Pressure From Iliad's Entrance; Reducing Fair Value Estimate
Italy accounts for the lion's share of Telecom Italia's revenue. Within Italy, the fixed-line business remains more than twice the size of the mobile business. While the core retail fixed-line business continues to shed customers and see sales declines, some of these losses are being offset by growth in other areas, such as broadband and pay television. TI is one of the most leveraged telecom operators in Europe. While it has sold assets and canceled its dividend, EBITDA continues to struggle with the weak economy, which has caused debt/EBITDA to increase, despite paying down some debt. Management increased its capital expenditures from 2015 through 2017 in order to enhance its networks similar to other operators, such as Vodafone, Deutsche Telekom, Orange, and Telefonica. While we agree with the concept of increased spending on one's network in order to distinguish it from its competitors, which should strengthen its moat, we think this is easier with a wireless network than a fixed-line network, which generally has requirements to wholesale capacity. While TI enhanced its 4G wireless network, the majority of the extra capital expenditures was spent on building out a fibre network. In other countries, the incumbent is laying fibre to compete better with the cable operators in providing high-speed broadband services. There is no cable competition in Italy, but others, led by Open Fiber, which is owned by electric utility Enel and Cassa Depositi e Prestiti, are building competing fibre networks. Additionally, Iliad launched its wireless service in June 2018 with an introductory rate of just EUR 5.99 per month, which will pressure pricing and margins on the wireless side. We are concerned regarding TI’s ability to compete against this additional competition when it’s financially constrained by its high debt load. Management still expects it can reduce debt to 2.5 times EBITDA, but we remain sceptical it can fight off competition and significantly decrease debt.
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