Swisscom signed “binding agreements” to buy “Vodafone Italia for EUR 8 billion on a debt and cash free basis with the aim of merging it with Fastweb"

Dr. Winfried Weigel, Zurich, 17 March, 2024

Largest Swiss acquisition by a Swiss headquartered company in the twenties, here are the detailed figures:

Vodafone “reshaped European footprint focused on growing markets, with strong positions and local scale.” It is a “Value-creating sale of Vodafone Italy to Swisscom for €8 billion upfront cash” at an “Attractive valuation, representing 26x consensus OpFCF and 7.6x consensus Adjusted EBITDAaL for FY24.” (from the VOD press release)

Swisscom expects “increased scale, more efficient cost structure and significant annual run-rate synergies of EUR ?600 million”, a “Substantial Value Creation”, at an “Attractive valuation with EV/EBITDAaL of 5.1x post synergies (€600mn p.a. times 5.1 = €3 bn) and EV/OpFCF of 9.2x post synergies”, but before Capex. “The transaction is a key step for Swisscom to achieve its strategic objective of profitable growth in Italy.” (from the SCM press release)

Does it mean that Swisscom will not meet its strategic objective of profitable growth without that investment?

The Italian telecom market is highly contested with very thin margins. The latest analyst presentation shows eight consecutive quarterly declines in customer numbers and an surprisingly low and further declining share of contract subscribers of just 14.1%. Annual sales of Vodafone Italy steadily declined from €6.2 bn in 2018 to just €4.8 billion in FY2023, and only €2.3 billion for H1/2024. The adjusted EBITDA for H1/2024 was €645 million, a steady decline from €917 million in H1/2022. €481 million were spent for Capex in H2 / 2023. The mobile churn for VOD Italy is 23.2%.

Fastweb shows €2.6 bn in revenue 2023, an increase of 6.1%, with an EBITDAaL (after lease expenses) of €743 million, a YoY decline of 6.8% (SCM segment reporting). The Capex for 2023 was €623 million.

Where should the annual €? 600 million come from?

And, Swisscom and Vodafone entered into multi-years services agreements that will result into further €350 million in revenue for year 1, paid by Swisscom, and unknown amounts for future years. “Swisscom will have the right to use the Vodafone brand for 5 years as part of the total consideration.” Will it ultimately become Fastweb? The deal should be earning accreditive in year 2, if the €600 million will be achieved, but most likely excluding the €350 million services fees to Vodafone.

Swisscom announced an offer to acquire 100% of Fastweb for CHF 6.04 billion (€3.74 bn) 17 years ago on 13th March, 2007, which was equivalent to a deal value of CHF 7.82 billion, including €1.1 bn in net debt. Fastweb showed €1.26 billion in sales 2006 with an EBITDA of €424.6mn, and 1.06 million customers at year end 2006. In the 17 years, sales increased by 160% and EBITDA by 75%. The offer price in 2007 was €47 a share and Swisscom secured 82.4% of the share capital. At the end of 2008 the share price closed at €3.66. In September 2010, Swisscom launched another takeover offer at €18 per share. On March 22, 2011, Fastweb was delisted after Swisscom triggered a squeeze-out for the remaining 2%.

The transaction value for the Fastweb acquisition was exceeding CHF 8 billion, the transaction value for Vodafone Italy in Swiss Francs is just below CHF 8 billion (EUR 8 bn), making it a combined investment of CHF 16 billion. The current market cap of Swisscom is CHF 27.3 billion with net debt of CHF 6.6 billion. The share price at CHF 527 is only slightly up over the past month and substantially lower than a year ago (approx. 10%). It reached an historic high since the burst of the bubble in 2000 at CHF 619.4 on 3 May 2023. However, with Closing sales should increase by at least CHF 4.8 bn and EBITDA by more than a billion, before synergies

Both, seller and buyer are happy with the valuation, and both state strategic reasons to sell or buy the business. Both will be happy with a positive development of Vodafone Italy, which will become the clear No. 2 in the Italian market with approx. 28% market share behind the incumbent operator with just over 40% market share and clearly ahead the no. 3 Wind Tre with approx. 14%.

The Deal does not need any shareholder approval. It will be 100% debt financed without negative impact on credit rating. Closing is expected in Q1 / 2025. Will the Swiss Franc further strengthen and interest rate come down?