Morgan Stanley says an acquisition of Vodafone Italy 'would be positive for Swisscom'

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Morgan Stanley says an acquisition of Vodafone Italy 'would be positive for Swisscom'
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Swisscom (SCMWY (OTC: SCMWY )) has entered exclusive negotiations to acquire Vodafone (NASDAQ: VOD ) Italia for 8 billion euros ($8.7 billion), aiming to combine it with its Italian branch, Fastweb, the companies announced on Wednesday.

The Swiss telecom provider’s shares closed 1.4% lower on the day, while Vodafone (VOD) fell 1.65% on the Nasdaq exchange.

The acquisition, proposed to be conducted in cash and free of debt, aims to establish Italy's second-largest broadband operator, trailing only TIM, and to become a dominant player in both the business and mobile sectors.

This potential transaction marks a significant milestone in Vodafone CEO Margherita Della Valle's tenure, fulfilling her commitment to addressing three challenging markets where the company has struggled to generate returns.

While Swisscom investors may be concerned that the elevated exposure to the Italian market would potentially diminish the company’s premium associated with its Swiss operations, Morgan Stanley analysts found the management's remarks on the matter notably optimistic.

The management stated that “any transaction would be value and cash flow accretive to Swisscom” and that the company “would retain at least an 'A' corporate credit rating following the acquisition, as well as that “there would be a positive impact on Swisscom's dividend policy.”

“The comment on the dividend comes as a surprise for us and is a significant development to be watched. Fixed-mobile merger synergies could range from 2%-11% of combined costs (opex & capex) for Vodafone Italy / Fastweb,” analysts said.

“This implies a potential FCF accretion range for Swisscom of +10% to +35% in our estimates,” they added.

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