The merger Wind-3 Italia may unlock convergence opportunities

07 August 2015
On 6 August 2015, CK Hutchison Holdings Limited, parent company of 3 Italia, and VimpelCom Limited, parent company of WIND, entered into an agreement to form a 50/50 joint venture that will manage the combined telecoms businesses. Completion is subject to regulatory approvals and is expected within twelve months. 
 
In a new blog post, Pyramid Research's Director of Europe, Pablo Iacopino, explains how this merger will affect the Italian telecoms market. Find some of the highlights below.
 
3 Group Europe has been a market consolidator over the last few years (Austria, Ireland, UK and Italy). However, Italy is the first country where the merger involves large fixed operations and a convergence strategy.
 
The combined entity will be:  
  • The second-largest operator by revenue in the Italian market with a combined 2014 turnover of €6.4 billion (~20% share of market revenue), compared to €5.8 billion for Vodafone and €15.3 billion for Telecom Italia.
  • The mobile leader with 31 million customers (34% market share), followed by Telecom Italia at 30 million and Vodafone at 25 million.
  • The second-largest fixed operator with 2.8 million fixed line customers(of which 2.2 million fixed broadband customers, 16% market share). This represents a key asset for fixed-mobile convergence.

 

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Exibit 1: Telecoms revenue and market share by operator in Italy, 2014.

Fixed-mobile convergence (FMC) take-up has been very slow in Italy because of regulatory constraint, absence of cable operators and the lack of integration between telecoms and media services (satellite and digital terrestrial dominate the pay-TV market in Italy), the latter only recently addressed through commercial partnerships with Sky, Mediaset and, more recently, Netflix.

However, quadruple play is not the only way. Fixed-mobile bundles without pay-TV have been successful in some Western Europe markets, for example in Spain and Belgium, and may be replicated in Italy. In Spain, the adoption of fixed-mobile bundles without pay-TV (33% household penetration in 2014) is higher than quadruple play adoption (13% household penetration). The household-centric value proposition proposed by the Wind-3 may drive demand for fixed-mobile bundles and unlock convergent opportunities for the whole market.

Moreover, price competition may intensify as Wind-3 may pass part of the Opex/Capex synergies to end-users. The combined entity expects to generate annual run-rate synergies of €700 million (90% expected by third year post-closing) mostly coming from Network & IT. The company could pass part of these synergies to end-users through more aggressive prices and offers, and could also increase its retention (churn improvement) and acquisition efforts.

Passing €200 million savings to end-users could mean a 5% average cut of mobile spend, which may be strategic to stimulate both convergent and LTE services. Wind-3 aims to accelerate its 4G roll-out with 90% population coverage by 2017, nearly in line with Telecom Italia and Vodafone. Further flexibility for the combined entity may come from a possible obligation to sell part of the combined spectrum as it will be slightly higher than its competitors Telecom Italia and Vodafone in the 2.6GHz band (FDD and TDD spectrum).

If you would like to read the full blog post, please click here

 

NOTES

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Pablo Iacopino is a Director at Pyramid Research and leads the Europe’s practice. He joined Pyramid Research in June 2015 after 11 years in the TMT industry. His work experience includes strategy, investor relations, equity research and industry research. 

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