Hutchison, Vimpelcom to merge Italian mobile businesses

Deal will reduce the Italian market to three players of roughly the same size

Vimpelcom and Hutchison have agreed to combine their Italian mobile operations in a long-awaited deal that would cut the number of players in Europe's fourth-largest telecom market to three from four.

The 50-50 joint venture, if approved by competition regulators, would combine Vimpelcom's WIND Telecommunicazioni, Italy's third-largest mobile network operator, with fourth-placed 3 Italia.

It would reduce the Italian market to three players of roughly the same size, and create a new competitor for Telecom Italia and Vodafone .

The new company said the deal would deliver cost savings worth more than 5 billion euros ($5.4 billion), most of which would come from combining the two mobile networks.

Vimpelcom shares jumped 3% at the New York open as investors welcomed a deal that should bring hefty synergies and may calm competition in Italy, where operators are emerging from a two-year price war. The shares closed 7% lower at $5.43.

Neither company will have to inject money into the new entity, in contrast to expectations that a capital hike of 2 billion euros was on the cards to help reduce debt.

A person close to the deal said the new company was valued at around 21.8 billion euros, with Wind's contribution being assets worth 13.9 billion in 2014, while Hutchison had 7.9 billion euros. Wind also has high debt.

GOVERNANCE

It remains to be see how the joint ownership will work, especially since Hutchison and Vimpelcom are backed by powerful billionaires.

Hutchison Chairman Li Ka-shing and Russian billionaire Mikhail Fridman - whose LetterOne fund holds 47.9% of Vimpelcom's voting rights - have held on-off talks for years on a deal in Italy and came close a few times before scrapping it at the eleventh hour over control.

"This is a true and well-balanced joint venture with Hutch and Vimpelcom sharing equal power," said the person close to the deal, adding the six-person board would be evenly split.

Maximo Ibarra, chief executive of Wind, will become CEO of the new entity. Stefano Invernizzi, finance chief of 3 Italia will serve as chief financial officer of the combined group, and Hutchison will name the first chairman.

The companies expect the deal to close in 12 months, and said they would begin discussions towards regulatory approval as early as September.

As in other mobile deals in Europe, regulators are expected to demand concessions to protect consumers from higher prices, such as requiring the new company to rent out space on its network to mobile virtual network operators (MVNOs).

But since European and national regulators have already given the green light to similar deals in Ireland, Germany and Austria, Italian consolidation is expected to get approval.

Vimpelcom's CEO Jean-Yves Charlier said the agreement with Hutchison allowed both parties to walk away from the deal if regulators demanded concessions that made it unpalatable.

Hutchison has considerable experience dealing with antitrust regulators since it was involved in similar transactions in Austria and Ireland. It is also now in the process of seeking approvals for acquisitions in Denmark and Britain.

Paul Marsch, a telecoms analyst at Berenberg Bank, said it remained to be seen how European Competition Commissioner Margrethe Vestager would approach the negotiation over remedies.

She put European telecom companies, which have been in a frenzy of dealmaking in the past two years, on notice in June by saying consolidation could be bad for consumers and innovation.

"We will know pretty soon whether Vestager's tough words translate into tough action," said Marsch.

Hutchison was advised by Goldman Sachs and law firm Freshfields. Vimpelcom was advised by HSBC and Morgan Stanley , and law firm Allen & Overy.