Vivendi and Niel on Telecom Italia: rivalry or alliance?

Telecom Italia Group is an Italian telecommunications company, founded in 1994 by the merger of five stateowned telecommunication companies. The company, headquartered in Rome, provides telephony services, mobile services and DHL data services. The major equity holder in Telecom Italia ordinary shares is Vivendi, a French multinational mass media company, which as of today holds the 20.031 % of Telecom Italia ordinary shares, with the declared intention to be a long-term shareholder in the group. At the end of October 2015, the billionaire Xavier Niel, who controls the French mobile and internet operator Iliad, bought a € 1.7 billion stake in Telecom Italia, becoming the second largest shareholder after Vivendi, with more the 15 % stakes through call options and other long positions. Even though Arnaud de Puyfontaine, Chairman of Viviendi, has declared to be surprised by Niel’s decision, this sudden move has given rise to takeover speculations that have consequently pushed Telecom shares up 11%.

 

The potential danger of an alliance between the two French tycoons has alerted the Antitrust authority, which has asked Niel for clarifications regarding the decision to acquire more stakes and the group’s main activities and key business areas. Consob, the Italian financial market’s regulator, is currently verifying Niel’s intentions to establish whether Niel and Vivendi may be acting in concert on Telecom Italia, with the aim of taking over the company.

According to JP Morgan’s analysts, this is not likely to be the case; they do not expect Vivendi and Niel to raise their positions above 25%, limit that will require an offer to minority shareholders. However, Telecom Italia doesn’t seem willing to take a risk and in order to dilute Vivendi and Niel’s positions has already proposed an extraordinary meeting where to discuss the viability of the conversion of preference shares in ordinary shares. In order to deeply understand what is Niel’s real purpose, it seems necessary to know more about the technical details of the acquisition. In fact, the French tycoon hasn’t bought Telecom’s shares directly on the market; he has subscribed € 250 millions call options for a 10.03% equity portion and the remaining 5.109% through an equity swap derivative. Actually, Consob is investigating on the call options. Basically, a call option is an agreement that gives the investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. Even if there are several different types of call options, only two of them are frequently exchange-traded on the market: Americans and Europeans ones. An American call option is an option that can be exercised anytime during its life. American options allow options holders to exercise the option at any time prior to and including its maturity date, thus increasing the value of the option to the holder relative to European options, which can only be exercised at maturity. Niel’s options maturity date is between June 2016 and November 2017. The distinction is a key factor which may reveals Niel’s real intention: if becoming a long-term shareholder (which means Niel’s has bought European call options) or just speculate on Telecom, buying American call options. The Italian financial community trusts the second hypothesis, and this translates into a profit, which has already been realized, of more than 11% (the percentage shares’ price has increased since Niel had entered Telecom Italia).
This represents a really interesting case in which we can see how stocks’ trend can be influenced by the largest investors and how it is relatively easy for them to realize huge profits.

Edoardo Ferrari

Federica Sestili

 

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