Swisscom's Acquisition of Vodafone Italia: A Game-Changer in Italian Telecomunication Sector

Introduction

The telecom industry is often affected by significant changes that alter the competitive landscape. The recent announcement of Swisscom's acquisition of Vodafone Italia, which denotes a seismic shift and has piqued the curiosity of analysts and investors alike, demonstrates this dynamic character. This merger represents a major turning point for the Italian telecom sector and also requires certain adjustments to the parties' and the industry's competitors' pan-European ambitions.

The Strategic Importance of the Deal

In a deal that was made public in March 2024, Swisscom, a major participant in the telecom industry, acquired Vodafone Italia, the Italian division of one of the biggest mobile network providers globally, strengthening its position. The deal, closed at $8.7 billion (€8 billion), is a calculated financial move that aims to raise Swisscom's profile in the Italian market and broaden its offering in terms of both products and services. Last January Vodafone refused the offer from Iliad to create a joint venture, because the operation would have been more risky for what concerns the reglementary authorizations than the one with Swisscom and also because there would have been the risk that the JV would remain highly leveraged in Italy.

The deal is to be effective in the first trimester of 2025 and, until then, the two companies will continue to operate autonomously. Then Fastweb will have acquired Vodafone Italia, constituting a NewCo with more than 19 million of mobile users (representing a weight of approximately 26% market share) and 5.7 million of broadband landline users (representing a market share of 30%), if the competent authority do not stop the M&A process for review on issues of monopoly. The agreement is comprehensive also of a yearly fee for allowing the use of the Vodafone trademark for five more years after the acquisition (in exchange for a yearly fee of €350 million).

The acquisition takes place in the context of several mergers and acquisitions in the TMT industry, as companies strive for greater market shares in a globalized marketplace by looking for economies of scale, synergies, and improved capacities to manage the intricacies of a constantly changing digital landscape: consolidation has been facilitated by previous agreements like Verizon's purchase of Yahoo and AT&T's merger with Time Warner.

The acquisition of Vodafone Italia by Swisscom demonstrates the company's intent to expand its business, take advantage of new technology, and maintain its position as the industry leader in telecommunications: Swisscom aims to unlock growth, innovation, and value generation through the integration of Vodafone Italia extensive network infrastructure, technological expertise, and customer base. While Swisscom endeavors to enhance cost efficiency and foster synergies to enable competitive pricing for innovative services within the Italian telecommunications (TLC) market, there exists divergence in industry approaches toward consolidation as the optimal avenue for growth. For instance, Iliad has recently emphasized its reluctance to pursue consolidation at all costs, as indicated in its latest press release.

The deal has strong strategic reasons, since it aims at integrating 2 operators that are very much akin by the positioning standpoint, thus there is the potential to create a competitor for Tim. The projection indeed indicate an EBITDA-AL of the new entity of 2.4 billion against the 1.8 billion from Tim ServCo; the two figures are very much in line: from the numbers for Fastweb, the expectations for 600 million from annual synergies from the marriage should be subtracted, since they are not immediately realizable.

Vodafone Italia has long been one of the big players in the Italian telecom industry, and Swisscom is taking a major strategic step into this market with this acquisition. Vodafone Italia has demonstrated moderate growth and competitiveness until FY 2022, supported by well-timed investments in digital services, infrastructure, and customer experience. Similarly, Fastweb, a telecommunications provider in Italy and a subsidiary of Swisscom, has emerged as a significant player in the broadband and business services domains, collecting market share from its pioneering introduction of optical fiber technology in the Italian telecommunications sector, coupled with a steadfast dedication to quality, that has propelled its expansion and solidified its position as a mid size competitor within the Italian market. In the last 10 years, Fastweb has grown by more than 50% in terms of number of clients, gross profit and EBITDA, and imposed itself as the leader in the fourth largest broadband market in Europe. Thus the integration with Vodafone Italia has the potential to benefit all the stakeholders of the company.

The NewCo will then be a stronger operator in the market, mixing the broadband and business expertise from Fastweb, and the mobile services strength of Vodafone (indeed, for what concerns the mobile client market, Fastweb will contribute only with its 3.4 million customers, representing just a weak 5% market share). Additionally, based on Kearney forecasts, the company is anticipated to hold a substantial 36% market weight in the Ftth sector, which will surpass the 28% held by competition operator Tim.

Vodafone Italia and Fastweb hope to optimize joint benefits, enhance operational performance, and raise stakeholder value through their merger under the Swisscom brand. These entities are united by a commitment to innovation, customer-centricity, and operational prowess. Swisscom has demonstrated its strategic acumen and prudent financial management through the financing of this historic transaction. Swisscom has designed a financing structure that maximizes the potential for long-term growth and wealth creation for its stakeholders by utilizing a 100% debt financing.

The purchase of Vodafone Italia by Swisscom is evidence of the industry's persistent spirit of innovation, competition, and strategic vision as the telecommunications market changes. Furthermore, Vodafone underlines the strategic vision underlying its decision to leave the Italian market as it had previously done with the Spanish one, in order to concentrate its activities in countries with larger perspectives for growth and to focus on the B2B segment. Thus the sale of Vodafone Italia represents just the more recent step, together with the merger of Vodafone UK and Three UK, of the renovation of the company European operations.

Swisscom's Acquisition Creates Telecom Duopoly in Italy

In the Italian telecommunications landscape, the upcoming merger between Vodafone Italia and Fastweb, orchestrated by Swisscom, has attracted the interest of industry observers, with far-reaching implications, particularly for competitors such as Tim and Iliad.

In the current Italian telecommunications panorama, TIM has a significantly larger market share than its competitors. However, the ongoing acquisition promises to revolutionize the situation in the industry. This impending change is driven not only by the merger between the second operator, Vodafone, and the fourth, Fastweb, but also by Iliad's steadily increasing presence in the Italian market. Iliad has seen a significant increase, reaching 10.73 million subscribers this year with 12 percent growth over the previous year. At the same time, TIM is facing an ongoing crisis, challenging its dominance.

The impending merger could create what is called a duopoly, a situation in which only two companies offer identical products with similar marginal costs, thus creating a significant concentration of power in the market. This scenario would put Iliad at a disadvantage, forced to compete with two giants that enjoy greater economies of scale. The words of Iliad CEO Thomas Reynaud, spoken before the merger announcement, clearly highlight the company's concern about this development: in his statement, he recalled among other things how Vodafone had rejected an offer from Iliad in 2023, which he said was considerably more advantageous, by about 3 billion euros more. Reynaud emphasized the potential impact on competition and consumer choice, hinting at a concern for his company's future in a market dominated by an emerging duopoly.

According to Intermonte's estimates based on Agcom(Communications Guarantee Authority) data, the combination of Vodafone and Fastweb would create the second largest operator in the fixed broadband sector, with an aggregate market share of 30.3 percent. In detail, Vodafone would hold 16.5 percent and Fastweb 13.8 percent, ranking just below TIM, which has 38.5 percent market share. They would also be the leading operator in terms of FTTH (fiber to the home) with a combined market share of 36 percent, of which Vodafone would have 18.5 percent and Fastweb 17.5 percent, compared to TIM's 25.9 percent. In the fixed business segment, the new entity would enjoy a strong presence with a combined market share of 35.1 percent, divided between Vodafone's 17 percent and Fastweb's 18 percent, compared to TIM's 41.5 percent.

At this point the question arises whether the acquisition is good for consumers and how competitors will react. Consumers wonder what the implications will be for them and whether this deal will impact their experience. They speculate that there are conflicting forces at play: on the one hand, the acquisition could reduce the number of competitors, thus affecting competition in the industry. Until now, Italy has been able to boast of very low-priced offerings precisely because of the presence of numerous operators with a market share of no more than 30 percent. However, with this acquisition, that could change. On the other hand, the entry of an operator benefiting from economies of scale could bring benefits, at least in terms of reducing the cost of supply.

As for the main competitors, the situations are different. TIM is in an increasingly difficult position, with the value of its shares having fallen by 60 percent in the past five years. In this period, the company will have to focus on itself, trying to maximize the value of its assets and reduce its debt level. One of the first actions will be the sale of the network to KKR for about 22 billion euros.

On the other hand, Iliad is growing strongly and could consider expansion through acquisitions. One of the main possibilities could be the acquisition of Wind, which has a strong presence in the mobile sector, an area in which Iliad would like to expand. Another option could be the purchase of Vivendi's stake in TIM. However, it is unlikely that Vivendi, considering its losses in recent years with TIM, would decide to sell its stake and record a significant capital loss on its balance sheets.

State Interference in Telecommunications: Swisscom's Italian Foray

Swisscom's acquisition of Vodafone has created an interesting paradox in the complex landscape of Italian telecommunications. This event meant not only a changing of the guard in TIM's main competitor, but also an intriguing reflection on state involvement within Swisscom's corporate structure. For Swisscom although a publicly traded company with a diffuse shareholder base, most of its shares are held by the Swiss government.

To get a sense of what Swisscom's shareholder structure looks like:

This fact takes on particular relevance in a crucial sector for any nation, such as telecommunications, and particularly in Italy, where telecommunications was once in the hands of the Italian state, but since 1997 it had been decided to privatize the sector, and now instead a company controlled by the Swiss state is emerging as one of the main players, and shortly TIM will probably also pass into foreign hands .

Although it is not unprecedented for Italian companies to switch to Swiss interests, as was the case with San Pellegrino in 1998, the presence of a state-owned entity from another country as a major player in the Italian telecommunications market, especially at a time of turmoil with the rise of Iliad and TIM's difficulties, certainly changes the competitive landscape significantly.

TIM now faces a competitor with solid resources and will need to adopt an equally robust strategy to meet this new challenge.

References

AGCOM. (December 22, 2023). Market shares of fixed network telecommunication operators in Italy as of September 2023 [Graph]. In Statista. Retrieved April 17, 2024, from https://www.statista.com/statistics/557386/italy-market-share-of-fixed-network-operators/

Biondi, A. (2024) La lunga Marcia verso La Fastweb-Vodafone (e Ciò Che Devono aspettarsi I clienti), Il Sole 24 ORE. Available at: https://www.ilsole24ore.com/art/la-lunga-marcia-la-fastweb-vodafone-e-cio-che-devono-aspettarsi-clienti-AFfJig4C (Accessed: 17 April 2024).

Olivari, Stefano. “Swisscom Ma Non Solo: Quando La Svizzera Compra in Italia.” Corriere Del Ticino, Corriere del Ticino, 16 Mar. 2024, www.cdt.ch/news/economia/swisscom-ma-non-solo-quando-la-svizzera-compra-in-italia-345943. 

“Tim, Il Paradosso Dell’ex Monopolista Che Competerà Con Lo Stato Svizzero.” 24+, 25 Mar. 2024, 24plus.ilsole24ore.com/art/tim-paradosso-dell-ex-monopolista-che-competera-lo-stato-svizzero-AFLxQJAD. 

“Agritech, 40 Milioni per Startup e PMI: I Bandi Della Fondazione Enea Tech.” CorCom, 15 Mar. 2024, www.corrierecomunicazioni.it/digital-economy/agritech-40-milioni-per-startup-e-pmi-via-ai-bandi-fondazione-enea-tech/. 

“Fastweb-Vodafone, Arriva La Conferma: Operazione Da 8 Miliardi.” CorCom, 29 Feb. 2024, www.corrierecomunicazioni.it/telco/fastweb-vodafone-arriva-la-conferma-operazione-da-8-miliardi/. 

Antonelli, Laura Naka. “Vodafone Italia-Fastweb Con Mossa Swisscom. Da Iliad Alert Duopolio, Occhio a Tim.” FinanzaOnline, 15 Mar. 2024, www.finanzaonline.com/notizie/vodafone-italia-fastweb-swisscom-iliad-dupolio-tim.