Telecom Italia: KKR’s €20bn offer should not be dismissed
The Italian government may be looking at different numbers, but the proposal deserves careful consideration
Giorgia Meloni’s government faces a test of its market credentials. Private-equity giant KKR has swooped on debt-laden Telecom Italia with a non-binding offer — reported at €20bn — for its fixed-line network. That will raise a variety of political concerns. But the rumoured price looks plausible, and the need for investment puts Telecom Italia under some pressure to do a deal. KKR’s offer should not be dismissed out of hand.
Telecom Italia has had a complex couple of decades. As a favourite takeover target for cash-strapped Italian entrepreneurs, it has been loaded up with acquisition debt, stifling its ability to invest. Today, it has €25.5bn of net debt — a chunky 4.4 times 2022 expected earnings before interest, tax, depreciation and amortisation. Spanish peer Telefónica is on 2.5 times.
In the short term, the group is protected by the fact that 65 per cent of its debt is fixed-rate with a five-year average maturity. But applying its marginal cost of debt to the whole of the €33bn gross debt mountain would add about €1bn to interest costs. Telecom Italia needs to sell a major asset and the network has already been prepared for a carve-out by chief executive Pietro Labriola.
KKR’s mooted €20bn offer for the whole of NetCo — at 10 times 2021 ebitda — is no knockout. Majority shareholder Vivendi — which has 24 per cent of Telecom Italia — has reportedly sought a much higher price. But TIM’s network is mostly copper, and requires some €7bn of investment to upgrade to fibre.
KKR’s money would allow Telecom Italia to cut its debt pile significantly. KKR’s 37.5 per cent stake in NetCo subsidiary FiberCop, the last mile of the network — might be valued at about €4bn. The remaining €16bn of proceeds (if TIM sold the whole of the network) would leave the rest of Telecom Italia with €9.5bn of net debt, or €4.5bn before leases.
The Italian government — which owns 10 per cent of Telecom Italia through Cassa Depositi e Prestiti, and can block a foreign takeover with its “golden share” — may be looking at different numbers. TIM has 40,000 employees — and it is not clear how many would go with a private-equity run NetCo. Still, Telecom Italia needs fixing. KKR’s offer deserves careful consideration.