By Camilla Palladino
www.breakingviews.com
Tiscali's investors have recovered some of their former optimism. The beleaguered Italian internet service provider's share price rose over 20% in September, after fears of a liquidity crunch rocked it earlier in the year.
This enthusiasm looks premature. Tiscali still needs to redeem a €250 million bond next year, and it cannot afford to do this out of its cashflows. And an asset disposal programme, which it pinned its hopes on after the low share price precluded a capital increase, has so far yielded disappointing results.
Granted, the group has sold several assets – including its operations in South Africa, Sweden, Norway and Switzerland – pretty quickly. But prices have been poor. These assets earned €105 million last year, almost 12% of Tiscali's €903 million of sales. So the selling price of €80 million is less than 80% of sales. The assets that Tiscali still has on the block generated about €80 million of revenues last year. So even if the company managed to extract a better multiple for them, it is hard to see how it could hit its stated aim of €250 million from disposals. It is not inconceivable that it might end up with a €100 million shortfall.
Key options
How is Tiscali going to deal with its payments gap? One option might be to cut capex to the bone and try to generate more cash that way. Although this might work in the short term, Tiscali would have to stop investment in local-loop unbundling, which gives it access to high-capacity lines. It would get stuck with a dial-up business. That is cash generative but it is also in secular decline.
Another option could be for Tiscali to dispose of one or more of its core businesses – in Italy, France, the UK, Germany and Benelux. The group denies it is in talks to do this but investors are nonetheless hopeful. France might be the better bet in a sale, as there is fierce competition and Telecom Italia, is trying to build a presence there. Even putting the unit's €190 million or so of sales last year on the same paltry multiple achieved with other asset sales, Tiscali might be able to get €152 million for it.
But selling core assets isn't a straightforward proposition. The incumbents in each country would be likely to encounter antitrust problems, so it would be hard to get an auction going. And Tiscali would in any case be seen as a forced seller. Given these constraints, it is conceivable that Tiscali might be forced to swallow its pride and issue equity at low prices. It is hard to see how investors' renewed optimism is justified.
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