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In the post

14 October 2015 By Neil Unmack

Poste Italiane is Italy’s biggest privatisation in a decade, valuing the company at up to 9.8 billion euros. It offers a good brand and branch network. But wait – it’s not really a post office at all. Given the challenges, the initial public offering warrants a hefty discount.

Despite the name, all of Poste Italiane’s operating profit derives from a bank and an insurer. The insurer is the most straightforward part. It is growing revenue at over 10 percent a year, as Italians seek investment alternatives to cash. Put its forecast earnings for next year on a multiple of over 10 times, similar to Assicurazione Generali, and it could be worth just under 4 billion euros, using Intesa Sanpaolo estimates.

Then there’s the bank. It gathers deposits from Italians, invests them in government bonds and collects fees from channeling deposits to the state bank, Cassa Depositi e Prestiti. Valuing it like an ordinary bank – totting up its future returns above its cost of equity – could give a value of 5.3 billion euros, assuming a return on equity of 14 percent, and a cost of equity of 10.5 percent.

Last comes the post office proper, which had a negative operating profit of 504 million euros last year. A more favourable regulatory framework may slow the decline in paper mail. Still, the value today is low. Intesa Sanpaolo values it at a maximum of 400 million euros. Given the odds, investors may simply value it at zero. Add in a mobile division, estimated by Mediobanca as being worth 384 million euros, and the whole company has an equity value around the top end of the IPO target range of 9.7 billion euros.

Still, investors may want a discount. The post office could continue to bleed money for many years. Even the bank has challenges. It is heavily exposed to Italian debt and the yields on its holdings are declining. New services like cross-selling asset management services require further investment. Factoring in an IPO discount, typically over 10 percent, and a price in the lower half of the 7.8-9.8 billion euro range seems sensible.

The government has reason to sell at an attractive price. It needs to sell assets to cut debt, expected at 133 percent of GDP this year. Poste needs a smooth delivery.

 

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