Telecom Italia: company break-up brings KKR back in play
Private equity group made its offer in November — a lot has happened since then
It is difficult to see KKR doing badly out of its involvement with Telecom Italia, whatever the outcome.
Italy’s largest telecoms operator says it is at last considering the private equity fund’s non-binding €0.505 a share offer. Made in November, this valued the group at €33bn including net debts. A lot has happened since, including the appointment of chief executive Pietro Labriola. His plan to split the company in two, announced in March, is strikingly similar to KKR’s own proposals.
This would involve breaking the company into broadband infrastructure and service network companies. The split would appease regulators, streamline financing and raise the valuation for the infrastructure business.
That is good in theory. But TI’s record of under delivery and its long line of previous chief executives leaves a lot in doubt. KKR might be able to do a better job at executing the plan. TI’s €0.30 share price show that investors doubt a deal will be struck with KKR — or that it would be at a price below the original approach.
The new broadband infrastructure company had revenues of €5.2bn last year. These include revenues from FiberCop, the last mile broadband network of which KKR acquired a two-fifths stake for €1.8bn in 2020. The new broadband company will be able to capture growth from rising broadband prices with a greater share of that going to FiberCop as fibre rollout continues.
On the 8.7 times ebitda multiple KKR paid for its FiberCop stake, the broadband company would be worth just over €19bn on this year’s earnings. Assuming leverage of 7 times, a buyout at that price might see KKR making a 1.9 times return on its investment. The annualised return over six years would then be 16 per cent.
A break-up would also pave the way for an eventual tie-up with smaller rival fibre network Open Fiber. That would satisfy the desire of Italian politicians for a single broadband network, albeit several years away at least. It would also allow KKR to net healthy returns on its 2020 investment without the headache of owning a political football.