Telecom Italia looks to put troubled past behind it with break-up
One-time monopoly seeks sounder footing after years of upheavals and decline
As an emblem of Italian business, Telecom Italia has had a long and lamentable record of upheavals, debt-laden struggles and political intrigues.
Now its future is once again up in the air, with the new management plotting a break-up of the group as international private equity firms circle around its assets.
The stakes are not small. An offer proposed by US fund KKR last November valued the company at €33bn, including net debt. Still not officially rejected, a takeover at that valuation would be among the biggest private equity buyouts in European history. It is highly unlikely to happen.
Pietro Labriola, the sixth chief executive at Telecom Italia in under a decade, has drawn up a plan to spin off the group’s Italian fixed network. The existing company would house all the remaining assets including its mobile operations and its Brazilian business. It is not dissimilar to KKR’s plan.
If either break-up plan goes ahead, it would be a denouement to what has come to feel like an unsustainable situation.
The company’s stricken share price — down some 60 per cent over the past five years — fell to an all-time low of €0.30 this month. That came after the group reported a record net loss of €8.7bn for 2021, leading to further downgrades of its already beaten-up credit rating. Vivendi, now Telecom Italia’s largest shareholder, wrote down the value of its 24 per cent stake by €728mn this month.
How it got to this point has been a sorry tale for a country that still sees it as a strategic asset. When Telecom Italia listed in 1997, it was dubbed the “mother of all privatisations” that took place in Italy during the 1990s, when the finance ministry’s top bureaucrat was Mario Draghi, the current prime minister.
What has dragged down this potentially very profitable business is a streak of strategic errors, partly driven by politics and some greedy shareholders, that have left it with too much debt. In 1999, as a newly privatised company, its net debt was €8.1bn. The figure currently sits at €22bn.
In 1999, after Rome blocked the company’s merger with Deutsche Telekom, it was acquired for €50bn in a debt-financed hostile takeover by a group of investors, led by the chief of Olivetti, dubbed “courageous captains” by Massimo D’Alema, former prime minister. That takeover was seen at the time as a genuine milestone for Italy and Europe that could redraw the map of cosy Italian capitalism.
However, after the group sold Telecom Italia two years later at a substantial profit, the company ended up with a debt burden on its balance sheet from which it never really recovered. At the pace of its current deterioration, the group risks needing a capital injection.
The obvious route now is to reorganise the business through a carve-out of its assets — an approach envisaged by Labriola and KKR — which would allow it to reduce its debt. The Labriola plan would involve a more extensive split-up. The KKR option lacks detail but it is disliked in some quarters of Italian politics where the company continues to be perceived as a national public asset.
Separating the primary network from the other services would also allow discussions over the single broadband network project to move forward. The project is a priority for Italian politicians.
The plan would also allow a merger between Telecom’s so-called “last mile” broadband network, FiberCop, of which KKR acquired a 37.5 per cent stake in 2020, with smaller and less profitable rival OpenFiber in which state investor CDP now holds a 60 per cent stake.
That all leaves KKR ‘s buyout option in doubt. On paper, discussions are ongoing, but insiders say they have come to a halt as the private equity group wants to run due diligence before putting forward a binding offer. They add that Telecom Italia is refusing that because if KKR were to ultimately walk away, or lower its offer, it would have negative repercussions on the share price.
Telecom Italia is a still prized asset. It is not for nothing that it is drawing interest from funds and private equity firms alike. This week the group also confirmed that it had received an offer from private equity firm CVC for a minority stake in the network services company that would be created following the break-up plan.
However, the group’s businesses need to be put on a sounder footing, not just for its shareholders but for Italy, which — more than two decades after its first takeover — is still waiting for its capitalism map to be redrawn.