Italian telecom network Plan B will be hurdle race

KKR may be getting a consolation prize after its failed takeover of Telecom Italia. The 6 billion euro Italian telecoms incumbent on Sunday took a formal step towards merging its broadband network – which counts the U.S. buyout giant as an investor – with state-controlled rival Open Fiber. Yet any agreement will need to win over shareholders, bondholders, and regulators.

KKR had hoped to take the debt-laden Italian incumbent private before engineering a separation of its fixed-lined network and arranging a possible marriage with Open Fiber. But opposition from Telecom Italia shareholders including French media company Vivendi forced KKR to ditch its 10.8 billion euro takeover last month.

The network merger offers a second chance to unlock value for KKR, which owns 37.5% of the Telecom Italia unit that operates its “last mile” broadband connections. A marriage with Open Fiber would remove competition at the wholesale level and eliminate unnecessary duplication of investment in digging up roads and laying cable.

First, however, the two parties must agree on a price. That’s not easy: infrastructure investor Macquarie last year bought 40% of Open Fiber at a valuation of over 7 billion euros including debt, even though the business generated EBITDA of less than 100 million euros in 2020. Telecom Italia’s network, which generates an estimated 2 billion euros of annual EBITDA, may be worth 19 billion euros including debt, analysts say.

Ownership is also an issue. Italian state investor Cassa Depositi e Prestiti (CDP), which owns 60% of Open Fiber, wants to control the combined entity. Italy’s competition regulator also won’t approve a merger if Telecom Italia remains in charge. That implies any deal will require a transfer of cash from taxpayers to the private-sector incumbent.

An alternative would be for Telecom Italia to shrink its share of the equity by transferring a large chunk of its 23 billion euros of net debt to the merged company. However, the company’s bondholders, who rely on the cash flow from the network to sustain the company’s debt, may be reluctant to give up control.

Finally, regulators are likely to impose some extra demands before allowing the two companies to create a de facto Italian broadband monopoly. Telecom Italia shares, currently languishing below 30 cents, reflect the fact that a network deal will need to clear several hurdles before reaching the finishing line.

Context news
Telecom Italia and Italian state investor Cassa Depositi e Prestiti (CDP) on May 29 signed a preliminary agreement with the aim of combining the telecom operator’s fixed-line network with that of broadband rival Open Fiber.

KKR and Macquarie, which have minority stakes in Telecom Italia’s last-mile network and Open Fiber, respectively, also signed the non-binding memorandum of understanding.

The parties aim to finalise a deal by the end of October. CDP will control the combined entity.

KKR, which in April gave up on its attempt to take over Telecom Italia at 0.5 euros per share, owns 37.5% of Telecom Italia’s FiberCop unit. Macquarie owns 40% of Open Fiber, which is majority-owned by CDP. The state investor also has a 10% stake in Telecom Italia.

Shares in Telecom Italia were up 2.5% at 0.29 euros at 0830 GMT on May 30. Reuters