KKR bid is next act in Telecom Italia soap opera

KKR is offering weary investors an exit from the Telecom Italia soap opera. The U.S. buyout group wants to take the phone operator private for 10.8 billion euros, ending years of wrangling between investors, board members and politicians. Though its opening bid is opportunistically below Telecom Italia’s pre-pandemic value, the 47% premium to last Friday’s closing price should appeal to all but top investor Vivendi. The board should at least take KKR’s call.

The buyout firm’s provisional offer for the former state monopoly is just the latest example of private equity barons raiding Europe’s depressed telecoms sector. KKR led a successful 3 billion euro assault on Spain’s MasMovil 18 months ago. Telecom Italia is on a different scale, though. Factoring in 26 billion euros of net debt, KKR is valuing the enterprise at nearly 37 billion euros.

That debt, equivalent to roughly 4 times the EBITDA analysts expect the company to generate next year, means KKR can’t use the typical ploy of adding leverage. A more plausible plan would be to unlock value via a breakup. The buyout firm last year bought 37.5% of FiberCop, which operates Telecom Italia’s broadband network, in a deal that valued the business at 7.7 billion euros. Offloading Telecom Italia’s 30% stake in 10 billion euro tower operator Inwit would help reduce debt, as would flogging its domestic telecoms services business.

KKR must first convince Chair Salvatore Rossi and the rest of Telecom Italia’s board that the offer is worth considering. Its bid of 50.5 euro cents per share in cash is slightly below where the shares were trading in mid-February last year, before Covid-19 struck. A valuation of 5.7 times next year’s EBITDA is also less than the 8 times that KKR paid for MasMovil.

Vivendi’s lack of enthusiasm is understandable: the French media group paid around 1.07 euros per share for its 24% stake. Telecom Italia shares were trading 12% below KKR’s bid on Monday morning, suggesting scepticism about the offer going ahead.

But the Italian government, which has the power to block an unwanted takeover, is making encouraging noises. With the board divided over strategy, the future for other shareholders looks dismal. Accepting KKR’s opening offer would be a mistake. Rejecting it out of hand would be an even bigger one. Reuters