MILAN (Reuters) - Telecom Italia (TLIT.MI) launched a plan on Friday to raise up to 3 billion euros ($4 billion) in costly hybrid debt and halved its dividend to help fund its infrastructure spending.
Reporting a strong rise in cashflow last year, the former national monopoly nevertheless missed its 2012 debt-cutting target because of delays to planned disposals and as a recession in Italy and slower growth in Latin America weighed on earnings.
Like other phone companies in Europe, Telecom Italia is struggling to fund improvements in its fixed and mobile networks while having to cut its mountain of debt.
Operating free cashflow rose more than 10 percent to 6.47 billion euros last year but the company said net debt had only been cut to 28.3 billion euros, short of its year-end target of 27.5 billion euros.
In raising new capital Telecom Italia said it had opted for hybrid debt - which combines elements of both debt and equity - instead of a straightforward share issue because it did not want to upset its shareholding structure. The company is controlled by Telefonica (TEF.MC), which faces its own debt problems, and a group of Italian financial institutions, which together own 22.4 percent.
“Our shareholders have to be protected,” Chairman Franco Bernabe said in a conference call. “We want to strengthen our infrastructure both in Italy and in Brazil and Argentina but at the same time we want to keep our deleveraging path.”
Shares in the company closed down 1.3 percent at 0.664 euros, having earlier fallen as much as 5.7 percent before the debt issue plan was announced. The share price has risen 12 percent in the last six months after hitting their lowest level in 15 years on concerns over its debt and business prospects.
Italy’s biggest telecoms group said it would issue the hybrid subordinated debt notes over a period of 18-24 months, with full details of the offer set to be presented once an investor roadshow gets underway shortly.
Company officials said the issue would have an equity component worth half its value but there would not be any mandatory conversion.
Small investor association Asati criticised Telecom Italia’s decision to issue hybrid debt as “very costly” and said a share issue was needed instead to fund the company’s growth plan.
Meanwhile Telecom Italia admitted that the sale of its cash-burning television unit Telecom Italia Media TCM.MI had been delayed amidst a worsening outlook for the advertising market.
While not selling its TV unit, which has a market value of some 220 million euros, would make little difference to Telecom Italia’s debt levels, a failure to sell would mark another setback for the group, which late last year rejected a 3 billion euro investment offer by Egyptian tycoon Naguib Sawiris.
Telecom Italia is also discussing with the state and regulators a separation of its fixed line network infrastructure, worth an estimated 15 billion euros, but analysts reckon the complexity of such a move means a deal might still be a year off.
Bernabe would only say on Friday that the talks were continuing and he was confident of a positive result.
“We believe the complexities can be handled,” he said.
Under its new 2013-2015 business plan announced on Friday the company said it would pay an annual dividend of 450 million euros, about half its previous target, and aims to bring its adjusted net debt down to less than 2 times core profit by the end of 2015.
Core earnings before interest, tax, depreciation and amortisation in 2012 declined 4.2 percent to 11.67 billion euros on revenue down 1.5 percent at 29.5 billion euros, both below analysts’ forecasts.
This year revenues are expected to be stable while EBITDA could fall by a “low-single-digit” percentage a and net debt should fall to below 27 billion euros, the company said.
Domestic revenues fell 5.8 percent in 2012, dragged lower primarily by weaker fixed line sales, while the decline in mobile services saw a modest improvement. Meanwhile its Brazilian unit TIM (TIMP3.SA) said earlier this week that quarterly sales rose at their lowest rate in nearly two years.
Bernabe said cost cuts, which one analyst described as impressive, helped to keep the operating results in line with the company’s targets.
Editing by David Goodman and Greg Mahlich