22 NOV 2021

KKR makes buyout offer for Telecom Italia

Private equity firm KKR is eyeing a further investment in Telecom Italia's fixed-line network as Italy's main telecoms group weighs options for its assets to appease top investor Vivendi.

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Private equity firm KKR is eyeing a further investment in Telecom Italia’s fixed-line network as Italy’s leading telecoms group weighs options for its assets to appease top investor Vivendi, which is piling pressure on Telecom Italia (TIM) Chief Executive Luigi Gubitosi after TIM issued two profit warnings in three months, cutting its free cash flow outlook and stoking concerns about its 22 billion euros ($25 billion) in net debt.

In a statement, TIM says its board of directors met on Sunday, November 21st, under the chairmanship of Salvatore Rossi to discuss a possible offer for the entire share capital of the company. KKR’s indication of interest, which is non-binding, would be conditional upon a minimum level of acceptance of 51% for both ordinary and savings shares. The declaration of interest is conditional to, amongst others, an estimated four-week confirmatory due diligence and clearance by crucial government stakeholders (TIM is subject to the government’s so-called ‘Golden Power’).

KKR already holds a 37.5% stake in TIM’s “last mile” network. It also foresees a price, to be paid fully in cash, of €0.505 per ordinary/savings share. According to the Financial Times, this would give TIM an equity value of €10.7 billion. The company also has around €22.5 billion on net debt. It adds that The KKR offer also drew out interest from rival funds, with CVC and Advent “open” to discussions with stakeholders, according to a CVC spokesperson in Milan.

Telecom Italia’s shares have declined about 50% in the past five years, and their current price is about 1.2 times earnings, a fraction of the 14 times averaged by its European peers, according to data compiled by Bloomberg. The company sits on a net-debt pile of more than 22 billion euros as of the end of September. That may be down 3.3 billion euros from the previous year, but S&P Global Ratings cut Telecom Italia’s rating to BB from BB+ on Friday.

KKR last year paid 1.8 billion euros for a 37.5% stake in FiberCop, the unit holding TIM’s last-mile network connecting street cabinets to people’s homes. The investor saw favorably the opportunity to boost exposure to TIM’s fixed-line assets as Italy prepares to spend billions of euros of European Union recovery funds to boost digital connectivity. KKR aims to have a sizeable stake in any combination between TIM’s critical fixed-line assets (running from switching centers to households, including the FiberCop network) with those of state-backed rival Open Fiber, now that a stalled single network plan has regained traction. The previous government-sponsored project has been put on hold with crucial figures in Prime Minister Mario Draghi’s coalition opposed to it.

KKR is eager to play a role in TIM’s asset revamp, increasing its stake in FiberCop and pushing for the merger with Open Fiber, the sources said, with one adding that KKR could even invest directly in TIM, provided the government agreed. TIM’s fixed-line assets are deemed strategic by the government, and state investor CDP has taken a 9.8% stake in the company to oversee them. Rome has special anti-takeover powers to shield companies deemed of strategic importance from foreign bids. It could use these to stop any move on TIM.

Italy has so far used these so-called “golden powers” four times since 2012 to veto foreign interests in the country. Two of these have been under Draghi’s ninth-month-old government. Another one of the sources said the government was informed of developments regarding TIM and KKR but was staying at arm’s length. Gubitosi, whose plan centers around creating a new company housing TIM’s various assets, has pledged to report back to the board about progress on the scheme after speaking to investors.