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Swisscom to acquire Vodafone Italia, creating a leading converged challenger in Italy

Via Swisscom

Mar 15, 2024

Swisscom has entered into binding agreements with Vodafone Group Plc in relation to the acquisition of 100% of Vodafone Italia for EUR 8 billion on a debt and cash free basis with the aim of merging it with Fastweb, Swisscom's subsidiary in Italy. The transaction consideration will be 100% cash and will be fully debt-financed. Vodafone Italia and Fastweb will bring together complementary high-quality mobile and fixed infrastructures, competencies, and capabilities to create a leading converged challenger in a market with material growth opportunities. The increased scale, more efficient cost structure and significant annual run-rate synergies of EUR ~600 million will enable the combined entity to unlock significant value for all stakeholders, sustain investments in the Italian telecommunication market and offer innovative, competitively priced converged services, improving performance and user experience for customers across all market segments. The transaction is a key step for Swisscom to achieve its strategic objective of profitable growth in Italy. Swisscom intends to increase the dividend and expects to retain its excellent corporate credit rating. The transaction remains subject to regulatory and other customary approvals.

Through this transaction Swisscom significantly reinforces its presence in Italy, where it has been operating successfully since 2007 through Fastweb. Fastweb has grown by over 50% in terms of customers, revenue and adjusted EBITDA over the past ten years and has established itself as a leading challenger in Europe's fourth largest broadband market. Vodafone Italia is a premium mobile network operator with a large customer base. By combining Fastweb's strengths in fixed connectivity with Vodafone Italia’s leading position in mobile services, the new entity stands to deliver substantial benefits to Italian consumers, businesses, and the country.

Value for residential mobile and wireline customers

Mobile customers will benefit from improved connectivity and best-in-class service quality, thanks to a fully controlled and end-to-end managed wireless network. Broadband customers will also benefit from increased service quality, thanks to the combination of Fastweb’s end-to-end managed wireline network and Vodafone’s 5G based Fixed Wireless Access (FWA). Therefore, residential customers in Italy will have access to high-performance combined fibre and mobile solutions. As a result, the combined customer base will benefit from greater convergence of services, improved performance and customer experience at competitive prices.

Value for business and public administration customers

Access to complementary assets and competencies such as Fastweb's leading-edge cloud infrastructure and Vodafone Italia's mobile assets will provide B2B customers with a larger portfolio of IT and communication services and an improved one-stop-shop experience, enabling faster digitalization for enterprises and public administration in Italy.

Value for the country and for competition

The combined entity will be commercially more resilient, ensuring long-term and sustained levels of investment in best-in-class network infrastructure and innovation in Italy, helping the country close the digital divide and accelerate the digital transformation of Italy. The transaction will create a challenger operator with convergent assets and the necessary scale, able to level the playing field and increase competition in the country; the combined entity will also continue to make available its high-quality infrastructure to third parties for wholesale services.

Significant value creation opportunity at an attractive valuation

The EUR 8 billion enterprise value implies transaction multiples of 5.1x EBITDAaL1 and 9.2x OpFCF1 based on annual run-rate synergies of EUR ~600 million (7.8x EBITDAaL and 29.4x OpFCF pre-synergies). The acquisition is expected to create substantial value for Swisscom's shareholders, to be free cash flow (FCF) neutral to Swisscom in year one and FCF accretive from year two after closing (excluding integration costs) and to contribute to FCF growth thereafter. This is fully supported by tangible cost and capex synergies with limited execution risk, as a significant portion of synergies is driven by migration of traffic onto the combined entity's own infrastructure.

Dividend increase and a strong balance sheet

The acquisition will be fully debt-financed, increasing Swisscom's leverage to 2.6x (Net Debt/EBITDA) at year end 2025, whilst maintaining a strong balance sheet. Swisscom expects to retain an «A» corporate credit rating, one of the highest debt ratings across European telecom peers, supported by a clear deleveraging path. Subject to closing in early 2025, Swisscom intends to increase the annual dividend to CHF 26/share payable in 2026 (for the financial year 2025), with the ambition for further dividend growth thereafter supported by synergy realisation and subject to FCF evolution.

Closing expected in Q1 2025

Closing is subject to regulatory and other customary approvals, will not require a Swisscom shareholder vote and is expected to occur in Q1 2025.

Post-closing relation with Vodafone Group

The combined entity and Vodafone Group will enter into several transitional and long-term service agreements, including a brand license agreement, which permits the use of the Vodafone brand in Italy for up to 5 years post-closing. Vodafone will provide certain services for an initial total annual service charge of EUR ~350 million, expected to decrease over time.

Swisscom and Vodafone Group are also exploring a closer commercial relationship to enable collaboration across a broad range of areas, beyond Italy. The key areas of commercial collaboration that Vodafone and Swisscom are exploring include IoT, enterprise services and solutions, procurement, operational shared services and roaming.

Continued investments in Switzerland

The focus on the Swiss market remains unchanged with continued high investments in innovation, top-quality service, and next-generation infrastructure. The existing network expansion targets, such as optical fibre coverage of 75 to 80% by 2030, therefore remain unchanged. Swisscom's operations in Switzerland and Italy will continue to be managed by two separate management teams with full focus on their respective markets, supported by lean group functions and with minimal operational interdependencies.

Swisscom will be strengthened as a whole

Christoph Aeschlimann, CEO Swisscom, commented: «Swisscom has been operating successfully in Italy since the acquisition of Fastweb in 2007. Over this period, we have built a strong track record of investment and profitable growth in Italy. The industrial logic of this merger is very strong. Fastweb and Vodafone Italia are an ideal fit to create high added value for all stakeholders. As a result, private and business customers will benefit from the most comprehensive offer. Swisscom will also be strengthened as a whole, allowing us to continue making significant investments in the Swiss and Italian market.»

Michael Rechsteiner, Chairman of the Swisscom Board of Directors, emphasised: «The Swisscom Board of Directors has thoroughly and comprehensively assessed the opportunities and risks of this transaction and has come to the firm conclusion that the opportunities for all stakeholders by far outweigh the risks inherent in a transaction of this size. The acquisition of Vodafone Italia is also compliant with the Federal Council's strategic objectives for Swisscom. With full conviction that the decision is in the interests of Swisscom as well as Switzerland as a whole, the board has therefore unanimously approved the transaction.»

Margherita Della Valle, CEO Vodafone Group, commented: «By bringing together Vodafone Italia and Fastweb, we are enabling the creation of a strong converged telco, well positioned to compete in the Italian market. And we are opening the opportunity to establish a broader commercial partnership between Swisscom and Vodafone.»

Transaction Advisors

Evercore Partners International LLP is acting as lead financial advisor to Swisscom in connection with the transaction. Deutsche Bank AG is acting as financial advisor. J.P. Morgan Securities plc is acting as financial advisor and rendered a fairness opinion to Swisscom. Deutsche Bank AG, ING Wholesale Banking in Switzerland and UniCredit are lead underwriters of the debt financing. Legance Avvocati Associati is serving as lead legal counsel to Swisscom, White & Case LLP as regulatory counsel, Travers Smith LLP as legal counsel for UK law, Sullivan & Cromwell LLP as legal counsel for financing and McDermott, Will & Emery Studio Legale Associato as tax counsel. PwC Switzerland and PwC Italy are acting as financial and accounting due diligence advisors to Swisscom.

1 Swisscom estimate for the 12-month period ending 31 December 2023, after adjusting for approximately EUR 176 million of group services charges which are not included in adjusted EBITDAaL for the purposes of Vodafone segmental reporting and EUR 97 million of non-cash accounting gains related to the sale of Vodafone Italia’s towers to Inwit that are included in adjusted EBITDAaL. OpFCF defined as EBITDAaL less capital expenditure.

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