Bologna, Italy, September 6, 2013
Bologna, Italy, September 6, 2013
KEY RATING FACTORS - STRENGHTS
1. Italian incumbent telco operator. With €29.5 billion turnover in 2012, Telecom Italia (TI) Group is the largest Italian telecommunications operator, with a well-established positioning in the domestic market (consumer, business, public administration and local utilities, financial institutions, etc.) with a differentiated offering of services/products thanks to significant investments in new services on mobile and wire networks as well as with improvements in the network infrastructure and in NGN’s (LTE and optical fiber). Given such positioning, TI is currently involved in a number of proceedings initiated by AGCom (the Italian Anti-Trust Market Authority in the Communications Sectors) for abusing a dominant market position.
2. International diversification. Although margins from South American markets (Brazil and Argentina) are lower than the domestic market’s, such a geographical presence allows cash flows diversification in countries with good growth potential. At the same time, that allows to counterbalance the reduction in the domestic market (revenues from South American markets have risen to 40% from 25% of the group’s turnover over the last three years).
3. Cash flows generation. Together with operating efficiency gains, the market positioning gained as well as the diversification in overseas markets have enabled TI Group to generate cash flows to cover investments and to repay debts. Losses in the financial periods 2011-H113 can be in fact attributed to goodwill impairment.
KEY RATING FACTORS – WEAKNESSES
1. Contraction of the domestic market. TI has seen a steady contraction in revenues in Italy (-5.4% in 2011, -5.8% in 2012 and -10,4% in H113), although Italy remains the main area of business and with the highest EBITDA margin. According to CRIF Rating Agency, a further rise in competitive pressure as well as the negative impact from regulation could lead to a further contraction in the EBITDA margin. This will be reducing the Group’s ability to generate cash flows from operations to cover investments and debt service in future financial years. H113 results have lead the Group to revise 2013 EBITDA targets downwards.
2. Net financial position (NFP) and debt burden. TI shows a significant dependence on third party financing (bonds in particular). Net borrowing is high (close to the annual turnover) resulting in a significant erosion of economic results. Deleverage is progressing at a more contained pace than industrial plans’ targets (adjusted NFP at €28.3 billion in 2012 i.e. €0.8 billion over target levels). H113 has shown a slight deleverage trend’s inversion by leading adjusted NFP to €28.8 billion. The equity reduction due to losses and dividends’ distribution resulted in a worsening of the NFP-to-equity ratio which, although not yet at critical levels, increases the dependence on third party finance. CRIF Rating Agency believes that further reductions in margins and less substantial operating cash flow generation might lead to new funding requirements to ensure repayments of due bonds and facilities.
3. Rigid asset structure and high value of intangible assets. CRIF Rating Agency considers TI’s asset structure as rigid, with a high amount of intangibles (in particular goodwill). The significant goodwill value of the “Domestic” business unit exposes TI Group to the risk of further impairment losses caused by the domestic market’s dynamics. Impairment losses over the last two financial years and in H113 have, in fact, significantly impacted the Group's economic results.
4. Evolving group structure. The Group’s structure, which has been affected already by a number of extraordinary transactions (sale of the “Media” business unit and merger of other Group’s subsidiaries), might be subject to further evolutions related to the possible resolution of the Telco S.p.A.’s shareholding agreement (shareholders have a first chance to exit Telco in September) and to the separation of the access network. The commitment to establish an operational roadmap for the separation of the access network has been confirmed recently by the Board following a go-ahead from AGCom. Being that to define, CRIF Rating Agency is currently unable to predict any impacts on the company's balance sheet, revenues and profitability.
Starting today, CRIF Rating Agency will be monitoring the rating assigned to Telecom Italia SpA on a permanent basis, possibly reserving the right to use, if necessary, any non public information provided by the issuer and proposing meetings with its senior management.
Contacts:
Lead rating analyst
Pietro Ragghianti, Rating Analyst
Tel.: +39-051.4176899
E-mail: p.ragghianti@crif.com
Back-up rating analyst
Stella Gentile, Rating Analyst
Tel.: +39-051.4175425
E-mail: s.gentile@crif.com
Approval:
Armando Guermandi, President of the Rating Committee
Stefania Negrini, Member of the Rating Committee
Ramona Rabbi, Member of the Rating Committee
Additional analytical and methodological information can be found on the website www.creditrating.crif.com
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