Hutchison’s $3 bn Italian buyout is a good call

CK Hutchison’s $3 billion Italian buyout is a good call. The Hong Kong ports-to-telecoms conglomerate is buying Russian-backed partner Veon out of their Italian mobile joint venture, Wind Tre. That is a bold step amid political instability and intensifying competition. But the deal could prove shrewd for new boss Victor Li.

On Tuesday, CK Hutchison said it would pay nearly 2.5 billion euros, or $2.9 billion, in cash for the rest of Wind Tre. The takeover comes less than two years after the $40 billion group closed a 50-50 merger of its 3 Italia operations with VimpelCom’s Wind Telecomunicazioni.

VimpelCom, since rebranded as Veon, is an Amsterdam-listed group whose biggest shareholder is LetterOne, a firm founded by oligarch Mikhail Fridman and various other Russian businessmen. Veon is moving to reduce debt and focus on emerging markets like Egypt and Pakistan instead.

The backdrop is disconcerting. Markets are grappling with the radical government of new Prime Minister Giuseppe Conte. Meanwhile, Wind Tre lags two larger rivals, and French upstart Iliad has just muscled into the market, having gained entry as a condition of the 3-Wind merger.

Still, that is offset by a good price. With Wind Tre carrying 10.3 billion euros of net debt as of March, this implies an enterprise value of 15.2 billion euros, or 6.7 times trailing EBITDA, according to CK Hutchison. The forward multiple is likely to be lower, assuming Iliad takes market share mostly from larger rivals and Wind Tre can keep growing its own EBITDA. That would mean there was not much of a premium for the sellers: listed European peers trade at an average 6.3 times estimated EBITDA, according to Barclays. The group could also eventually enjoy the use of nearly 1.6 billion euros in deferred tax assets, its last report shows.

In addition, Li can reap financial benefits by integrating the business more closely with his other telecoms operations – which is much trickier with a joint venture. And he no longer has to worry about potential future disagreements with his co-owners. This is always a risk in JVs, and was a heightened one with Fridman, who has sparred with previous partners including BP and Telenor. For Li, doubling down in Italy looks like the right call.