Swisscom’s Italy foray works best as a first step

Italian ambitions. Swisscom is attempting to make big money in one of Europe’s least profitable telecom markets. The $30 billion Swiss telecom operator pledged on Friday to deliver 600 million euros of annual savings from splicing its 8 billion euro purchase of Vodafone’s hard-pressed Italian operations with its own Fastweb unit. To succeed, the synergies will need to materialise, and Italy’s highly competitive mobile market probably also requires further consolidation.

Swisscom CEO Christoph Aeschlimann does not lack ambition. After beating Iliad’s founder Xavier Niel in the race to get Vodafone, he is now promising investors he can double operating free cash flow of the merged entity to 1.1 billion euros by generating savings worth 5.5 billion euros once taxed and capitalised and before integration costs. He also looks to have a path to achieve that.

Aeschlimann can save 240 million euros per year by removing the current cost to Fastweb of reselling wireless communication to consumers, and also some fixed-network access expenses. Being more efficient on capital expenditure should save another 60 million euros. And about 150 million euros will come from removing some job overlaps as well as cutting duplications in IT and retail shops. More importantly, Swisscom will save 150 million euros a year by paying less for services Vodafone provided to its Italian unit.

Even so, Swisscom’s market cap has risen by less than 1 billion Swiss francs since the two companies confirmed they were in talks at the end of February. That may be because investors are discounting the synergy goodies. Throw in 700 million euros of integration costs, and the need for Swisscom to pay 350 million euros to Vodafone in the first year and then a tapering amount until it replaces its centralised services, and the savings’ value is more like 4.5 billion euros, Breakingviews calculations show. Meanwhile, investors will receive the full benefits only after 2029.

The more pressing issue, however, is that the Swisscom acquisition does not resolve a vexing problem. At less than 12 euros of average revenue per consumer, the Italian market is one of the least lucrative in Europe. Vodafone’s business is concentrated in the least profitable consumer segment and had been losing revenue for years. Since Swisscom’s Italian operator Fastweb is chiefly a fixed-line operator, the acquisition does not really remove a large mobile player from the market. The new group will be stronger but will still have to compete against Telecom Italia, disruptor Iliad and WindTre.

Swisscom’s Italian move is a logical first step. But to improve its long-term prospect in Italy, some of its competitors probably need to merge too.