Tim on a rollercoaster after ruling on maxi refund and savings share conversion

(Il Sole 24 Ore Radiocor) - Telecom Italia on the roller coaster and Piazza Affari. After a start of the session in positive territory, with an increase of more than one percentage point (+5.2% at the beginning of the session for savings), the shares braked abruptly, dropping more than 6%, only to rise again and rank among the best stocks on Milan's main list. Although the decision of the Court of Cassation to return the concession fee (worth a total of EUR 1 billion) and the extraordinary Board of Directors' decision to convert the savings shares into ordinary shares on the basis of a conversion ratio of 1 ordinary share for each savings share held, plus a cash adjustment totalling EUR 0.12 per savings share, are positive, the stock is the protagonist of a sell-off due to a number of reasons. From the trading rooms, they point out that the Supreme Court's decision, although positive, was widely expected. Moreover, they point out, the stock is coming from a truly brilliant performance at Piazza Affari. Suffice it to say that since the beginning of the year, the shares have gained over 90%, with the maximum reached at the end of October when a share was worth EUR 0.53 (levels not seen since 2020). Currently, each ordinary Tim share is worth EUR 0.47.

Equita's analysts point out that the board also resolved to propose the voluntary reduction of share capital to EUR 6 billion, allocating the excess amount to the legal reserve until one-fifth of capital is reached and the remainder (estimated at EUR 5.1 billion) to available reserves. In addition, an extraordinary and special meeting of savings shareholders has been convened on 28 January to approve the conversion. If the proposal is approved, the savings shareholders who did not vote in favour of it will have the right of withdrawal at a price of 0.5117. "The voluntary conversion proposal," the brokers explain, "offers a premium of 8.3%, compared to last Friday's closing stock market price. The premium is 10.6%, 13.5% and 21.6% over the one-month, three-month and six-month averages'. Moreover, again according to analysts, the premium compares with a series of privileges including "a minimum dividend of 2.75 eurocents to be paid compulsorily in the event of a captive profit for Tim Spa; the payment of any dividends not paid in the past two financial years (5.5 eurocents) and a minimum 1.1 eurocents surcharge over ordinary shareholders in the event that a dividend is paid to ordinary shareholders".

According to Equita, 'the mandatory conversion proposal seems unattractive'. Going into detail, Equita considers the transaction positive in that it 'simplifies the group's capital structure and improves the overall liquidity and weighting in the share indexes. Moreover, thanks to the cash component of the conversion, it allocates part of the proceeds of the concession fee (about 720mn looking at the voluntary conversion), effectively creating a buy-back on the group's capital compared to an all paper transaction'. Moreover, 'for the ordinary shareholder, it reduces the cash and profit leakage linked to the savings share privilege, thus improving Eps 2026-27 by 11%/9% in our estimates, based on the proposal formulated by the company'. In terms of governance, "based on the voluntary conversion proposal submitted, Poste Italiane's shareholding would be diluted to 19.6% of the voting capital from the current 27.3%, thus returning below the current 25% takeover threshold. The other ordinary shareholders would hold 52.2% of Tim's capital and the current savings shareholders would have the remaining 28.2% of the capital'. Incorporating the conditions of the voluntary conversion, "the full impact (100%) of the concession fee repayment (previously incorporated at 90%) and the mark-tomarket of Tim Brazil, valuations would move to euro 0.51PS for ordinary and euro 0.63PS for savings. However, we think that the benefits of the capital simplification may justify a partial rerating of the valuation multiples not yet reflected in this calculation."

In a comprehensive report, Intermonte reaffirms its Buy rating on the stock and raises the target price for ordinary shares to EUR 0.68 to fully incorporate: "the collection of one billion from the concession fee (around 0.05 euro/share), a cash outflow of around 630 million in favour of TITR shareholders (around 0.03 euro/share; previously 498 million for accrued dividends) and a value creation of more than 1 billion (around 0.05 euro/share) thanks to the elimination of dividend leakage to minority savings shareholders". More specifically, the experts point out that 'the conversion operation aims to simplify and rationalise the capital structure, reducing governance and management costs, increasing liquidity and significantly expanding the free float of ordinary shares, with the issue of 6 billion new shares. Assuming an acceptance rate of 80% for the voluntary conversion and 20% for the mandatory conversion, we estimate a cash outlay for TIM of around 630 mln. We also estimate a value creation of EUR1bn (NPV) from the elimination of the annual dividend payout of EUR66m to TITR shareholders (assuming a return to payment of the ordinary dividend from next year)'. In addition, the 'proposed voluntary reduction of share capital to €6bn (from €11.7bn) envisages the allocation of up to one-fifth to the legal reserve and the remainder to available equity reserves, with the aim of rebalancing shareholder wealth after the sale of FiberCop and financing the conversion of TITR shares and related cash bonuses'.