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Telecom Italia: will board revamp help ring in the changes?
KKR faces political hurdles and potential rivals in its €33bn takeover pursuit
Luigi Gubitosi pledged to make Telecom Italia a “normal company” that was capable of executing a recovery plan when in 2018 he became its fifth chief executive in six years.
Instead, his three-year anniversary in the post was marked by his resignation, having failed to deliver on this simple ambition and following a week of drama after the Italian telecoms group received a €33bn takeover offer from US private equity firm KKR.
In a letter to the board ahead of an extraordinary meeting last Friday afternoon, Gubitosi offered to quit to facilitate talks with the US buyout fund. By the end of the day he had been replaced by Pietro Labriola, head of Telecom Italia’s Brazilian division, although his successor was given the title of director-general and Gubitosi will remain on the board.
“I am very satisfied [with] Labriola’s appointment,” Rossi said.
But with the management overhaul representing neither continuity nor a total break, the future for Telecom Italia remains unclear just as dealmaking in Europe’s telecoms sector heats up.
KKR’s offer earlier this month sent shock waves through the industry and Italian politics. If successful, the takeover would be the biggest private equity buyout in European history and represent the boldest attempt by the industry to break up one of the continent’s former telecoms monopolies.
The US group had already signalled its interest in telecoms when it made a surprise bid for Dutch incumbent KPN earlier this year that was rejected.
Telecom Italia is a much bigger prize. But the hurdles for a deal are sizeable: among them uncertainty over whether the Italian government — which has a near-10 per cent stake held by state investor Cassa Depositi e Prestiti — will approve, the sheer size of the group and its sluggish performance, and potential rival bids from other PE firms.
The role of Vivendi, Telecom Italia’s largest shareholder with a 24 per cent stake, is also critical. It has already deemed that the price offered by KKR, around half the average that it paid to build its stake in 2016, according to analysts, is too low.
The French conglomerate had planned to push a no-confidence vote in Gubitosi at the Friday board meeting, according to several people with knowledge of the talks, owing to dissatisfaction with Telecom Italia’s poor performance. Several other board members had also requested the meeting to discuss Gubitosi’s future, according to the people.
Vivendi and KKR declined to comment.
The bid from KKR follows a bruising year for Telecom Italia. The group issued two profit warnings in succession, a complex merger plan with rival Open Fiber appears to have run aground and a football broadcasting deal with UK-based platform DAZN, pushed by Gubitosi, was not as profitable as shareholders had hoped. Telecom Italia’s stock had fallen almost 40 per cent in the period since Gubitosi took charge and prior to the KKR offer.
KKR’s offer of €0.505 a share in cash was pitched at a 44 per cent premium to the company’s previous closing price, giving it an equity value of €10.7bn. The telecoms group has roughly €22.5bn of net debt.
Its proposal involves breaking up Telecom Italia and operating the network through a company controlled by Cassa Depositi e Prestiti, which also owns a stake in Open Fiber.
Mario Draghi, Italy’s prime minister, told a press conference in Rome last week that the government’s priority would be protecting Italian jobs, technology and the network. He has established a working group made up of key ministers to consider Telecom Italia’s options.
“The offer is good news for the country because it means foreign investors’ mood has shifted in a positive way,” said one government official. “But nothing has been decided as there is nothing substantial on the table for us to evaluate right now.”
The government has a so-called “golden power” to block the takeover should it be deemed not in the national interest.
KKR faces stiff opposition from some quarters of the Italian parliament, including populist leader Matteo Salvini, and security services concerned about the potential sale of a strategic national asset.
So far, Draghi has refused to get directly involved and there are contrasting views within his government on the best way forward, according to three members of the cabinet. By coincidence, it includes one of European telecoms’ greatest dealmakers — Vittorio Colao, minister for innovation and digital transition and one of Rome’s main interlocutors with Brussels.
The former chief executive of Vodafone negotiated the $135bn sale of the UK company’s stake in Verizon Wireless as well as the €19bn takeover of Liberty Global’s central European assets. He declined to comment on the KKR approach.
KKR’s involvement has already drawn out the interest of rival private equity groups, some of whom have also spent a long time weighing how the behemoth could be carved up and taken private.
Luxembourg buyout group CVC Capital Partners and US group Advent International are “open” to discussions, CVC has said, although KKR’s stake in Fibercop, Telecom Italia’s ‘last mile’ network, could complicate matters.
Vivendi has denied being in talks with the funds and reiterated it wants to be “a long term investor in Telecom Italia”.
Olivetti, Deutsche Telekom, AT&T, Telefónica and Vivendi are among the companies that have tried to buy or take control of Telecom Italia over the past two decades.
One Italian telecoms executive called the offer a “wake-up call” for a sector that has struggled to deliver growth.
Telecom Italia’s market capitalisation had slumped to €7.5bn before KKR’s offer. That reflects a deteriorating financial performance for an incumbent that faces ferocious competition in its home market from Vodafone, CK Hutchison’s Wind Tre and Iliad, controlled by French billionaire Xavier Niel.
Revenue in the first nine months of the year fell 2 per cent to €11.4bn but pre-tax profit slumped 85 per cent to €167m. Standard & Poor’s cut its rating on Telecom Italia’s debt to below investment grade last week.
Maurice Patrick, an analyst with Barclays, said it remains difficult to judge whether KKR’s plans have a better chance of success without more detail on its strategy. “The end game remains uncertain,” he said. “A simple takeover of the current equity would only add debt to the structure, which is not a constraint that TI needs.”
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$32bn Grayscale Bitcoin Trust feels the heat from cheaper ETFs
GBTC trades at a 15% discount to the value of its underlying assets
The North American rollout of bitcoin exchange traded funds appears to have tipped the world’s largest crypto fund into a seemingly permanent discount to its net asset value.
The $32bn Grayscale Bitcoin Trust (GBTC), which owns 3.5 per cent of the world’s bitcoin, currently trades 15 per cent below the value of its underlying assets.
It had traded at a substantial premium to NAV for much of its existence but stumbled to a sharp discount after the emergence of the first North American bitcoin ETF in Canada in February.
The flip from premium to discount has hit investors in the pocket. While GBTC’s share price rose 42 per cent in the first 10 months of this year, its NAV jumped 92 per cent and the price of bitcoin 95 per cent, according to Morningstar. In the 12 months to the end of October, while bitcoin surged 340 per cent, GBTC’s share price was up 220 per cent, Morningstar found.
Some 47 funds, including the $5.5bn Ark Next Generation Internet ETF, separately managed accounts and model portfolios, held GBTC as of September, according to Bobby Blue, senior manager research analyst at Morningstar, making it the most widely held crypto-related product.
“I think it’s a problem [for GBTC],” said Blue. “Competing products, some with better fee structures, some with better ways of tracking bitcoin, have come to the market and that will pose a challenge to them to narrow the discount.”
Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, said GBTC was “previously a good way to get exposure to bitcoin,” but that new products had muscled into its territory.
“The initial launch of a bitcoin ETF in Canada was a key milestone for investors and a key milestone in the history of GBTC because there is now an alternative that has the benefits of the ETF structure,” Rosenbluth said.
GBTC is a closed-end fund, which means it cannot easily add or remove shares to deal with inflows and outflows. As a result, its share price is determined by supply and demand, rather than being tied to the underlying value of its assets, as would be the case with an ETF, where new shares are created and redeemed seamlessly.
Between early 2020 and February 2021, Grayscale filed 35 reports with the Securities and Exchange Commission indicating it had created and sold additional shares to accredited (largely institutional) investors in private placements, according to Morningstar.
Demand was buoyed by the premium to NAV that GBTC traded at during this period, which facilitated an arbitrage trade that saw hedge funds buy new shares at NAV then, after the expiration of a lock-up period, sell them at market price. This helped fuel demand that saw GBTC’s assets soar from about $3bn at the start of 2020.
Blue said that dynamic “flipped” in February 2021, when the Purpose Bitcoin ETF, the first Canadian spot bitcoin ETF, launched, amassing more than $1bn in assets within a month.
“Its management fee of 1 per cent is half that of Grayscale Bitcoin Trust, and its structure as an ETF allows it to track bitcoin more closely, making it more appealing than Grayscale’s offering,” he argued.
Although US retail investors are not able to invest in Canadian ETFs, US institutions are, “so there was some rotation to that product”, Blue said.
Additionally, he said Grayscale “might have simply issued too many shares”, throwing supply and demand out of kilter.
What happens next is unclear. Existing investors face either selling at a discount or sitting tight and hoping for the best, while paying a 2 per cent annual fee. This is above the 65-95 basis points charged by recently launched US-listed bitcoin ETFs although, as these ETFs are based on bitcoin futures, the roll fees they face could be 5-10 per cent a year.
New investors could, in theory, buy the closed-end fund because its discount to NAV represents an arbitrage opportunity, but only if there is a path to close the discount.
“Right now, absent a redemption programme or, the elephant in the room: converting to an ETF, you are never going to realise that discount,” said Blue. Meanwhile “as other newer products draw more money out of the trust, there is the possibility of wider discounts”.
A redemption programme would involve Grayscale offering to cancel some shares, with exiting investors being paid at NAV.
The downside for Grayscale is that it would mean a loss of assets, and therefore fee income. Its filings with the SEC say it “currently has no intention of seeking regulatory approval” to start one.
Converting GBTC into an ETF is Grayscale’s professed goal, and it has filed with the SEC to do so. But the SEC has so far shown no willingness to approve spot bitcoin ETFs.
Rosenbluth noted that “anyone who has held GBTC for a year or more is still likely to have made significant total returns”, given the soaring value of bitcoin.
Grayscale said the price at which GBTC trades at is “subject to market forces, a risk inherent in any publicly traded investment product,” and denied it had issued too many shares.
Grayscale argued that “the most efficient way to resolve any discrepancy between GBTC’s share price and the NAV,” would be for it to be able to convert into a spot ETF, something “the US investment community is eager for . . . is ready for and deserves”.
In that eventuality “we would expect the redemption mechanism inherent in the ETF structure to remove any premium or discount on GBTC’s share price. With that frame of mind, the discount may represent a buying opportunity for opportunistic investors.”
Nissan seeks to dominate electric vehicles with $18bn investment plan
Japanese carmaker announces new models but falls short of declaring end to fossil fuel engines
Nissan has announced a ¥2tn ($17.7bn) vehicle electrification plan in a bid to “democratise” battery-powered cars and assert its dominance over incumbent global automakers and newcomers such as Tesla.
Delivering a long-term strategy it dubbed Nissan Ambition 2030, the Japanese carmaker stopped short of predicting an end to its production of internal combustion engine vehicles — an announcement that some analysts had speculated could be imminent.
But the company set itself an electric vehicle sales target of 75 per cent of its European sales by fiscal year 2026 and 40 per cent of its sales in the US by 2030.
Nissan’s plan includes the proposed introduction of 23 “electrified” vehicle models by 2030, 15 of them fully electric. The remainder would be hybrids or would fall under Nissan’s “e-power” designation of vehicles that are driven by a battery but recharged via a petrol engine.
Previously announced elements of the strategy included a $1.4bn investment in the UK that will help convert Nissan’s Sunderland operations into a hub for electric vehicle production.
Nissan chief executive Makoto Uchida said the plan arose from an end to the company’s woes of recent years, a renewed sense of profit stability and fundamental changes in the automotive market.
“Nissan has emerged from crisis and is ready to make a new start,” said Uchida.
Nissan shares fell 4.5 per cent on Monday, making it the day’s worst performer among Japan’s top three automakers. The company is also recovering from a scandal involving former boss Carlos Ghosn, which Uchida did not mention.
The carmaker’s ambitions also involve a bet on the success of its all-solid-state battery technology. ASSBs deliver greater range and power density — a measure of the amount of energy that can be discharged from a battery. Vehicle makers and investors approve of their lower costs, higher performance and greater safety, but ASSBs cannot yet be reliably delivered in a mass-market format.
As well as building a pilot factory for ASSB devices within the next three years, Nissan plans to offer the technology in a mass-market electric vehicle by the fiscal year ending in March 2029.
Other carmakers including Nissan’s powerful domestic rival Toyota are engaged in a hotly-contested race for a fully solid-state battery, a potentially transformational technology.
In the meantime, said Uchida, Nissan would continue to chip away at existing lithium-ion battery costs, which he forecast could be reduced by 65 per cent within the next eight years.
Nissan’s ambitions for electric vehicles have consistently outpaced those of its Japanese competitors, which have continued to target other technologies such as hydrogen and fuel cells.
Under Ghosn, Nissan pushed into mass-market electric vehicles a decade ago with the introduction of its first-generation Leaf model. US and European competitors including Volkswagen, Ford and General Motors have since developed electric vehicles with an eye on rapidly growing global demand.
But not all have translated those ambitions into clear climate commitments. At the UN COP26 summit in Glasgow this month, only 11 automakers signed a declaration committing to end fossil-fuelled vehicles by 2040. Nissan, along with Toyota, Honda and BMW were not signatories.
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