Telecom Italia and the curse of the euro era

The leveraged takeover of Telecom Italia in 1999 by an obscure auto-parts magnate from Mantua was the deal that baptised the euro era. For the first time, bankers were able to assemble a consortium of risk-takers in debt, equity and other securities – all denominated in the single currency which had been born a few months earlier – to launch an unthinkably large and aggressive capital markets transaction in which Roberto Colaninno and his mates took control of Italy’s telecommunications monopoly.

By the standards of the time that operation was a success, even if Colaninno barely snagged 50% of the company. In hindsight it has been a slow-burn disaster. Telecom Italia’s story reads more like that of a botched privatisation, with hints of a Russia-style kleptocratic bleeding, in which a succession of dim-witted investors wielding tiny slivers of capital have controlled, and progressively weakened, one of the country’s vital infrastructure assets.

Two decades on, there’s a chance to rectify past mistakes. Ironically, Rome’s brighter future may arrive in the guise of a saviour once dubbed a barbarian at the gate. Private equity firm KKR this week offered to take Telecom Italia out of its public-market misery. Its improved chances of success mark an evolution of Europe’s capital markets that the original deal never managed to achieve.

A successful takeover of Telecom Italia, known to its customers as TIM, would export at scale a more modern form of capitalism to Italy. This is an approach to corporate governance where control and power matters less than competence, resilience and results. That’s coherent with Prime Minister Mario Draghi’s ambitions to make Italian companies more competitive, and to lower the cost of capital for the nation.

It won’t be a straightforward path for KKR or any buyout rival capable of marshalling the more than 11 billion euros required to buy TIM’s equity. The company is more war-torn state than modern telecom operator, scarred by internecine warfare between rival shareholders and board members. These include French telecom and media group Vivendi and its boss Vincent Bolloré, institutional investors like BlackRock and Vanguard, and the Italian Republic itself.

Ever since the government privatised Telecom Italia in 1997 the company has been the investment equivalent of Afghanistan. The Colaninno takeover was the first major battle, but each skirmish has generally resulted in financial injury for investors and further debilitation of the company.

Consider some basic numbers. To storm the ramparts, Colaninno and the enterprise he ran, Olivetti, orchestrated a complex transaction that put an enterprise value on the company of around $60 billion. KKR’s most recent cash offer of 50.5 euro cents per share values the whole business at around $37 billion, including debt. In other words, some $23 billion of wealth has vanished.

For stockholders, the decline has been precipitous. Since Colaninno’s arrival the total return for shareholders, including dividends, has been negative 83%, according to Refinitiv data. That compares with a positive return of around 40% for the MSCI Europe Telecoms Services Index over the same period. The MIB 30, Italy’s benchmark which includes TIM, has returned 66%.

The company’s abysmal performance explains the divergence. In Telecom Italia’s 2000 annual report, Colaninno boasted of a growing business with 56 billion euros in revenue and 25 billion euros of EBITDA. By 2020, the top line had shrunk to 16 billion euros, with just under 7 billion euros of EBITDA. True, the company has disposed of assets, rejigged its corporate structure and made other tweaks. But the narrative is undeniably one of colossal corporate decline.

Yet, as with Afghanistan, there has been no shortage of invaders. Colaninno only lasted a couple of years. While he personally enjoyed the fruits of his victory, and the adulation it accorded him in Rome, his backers became disillusioned. They ultimately plotted his ouster in 2001, while he was on a hunting trip in Argentina.

The Colaninno crew sold its 23% stake in Olivetti, which in turn held 55% of Telecom Italia, to a shell company led by Marco Tronchetti Provera, the head of Pirelli, and the Benetton family. The new owners were thus able to call the shots without offering a takeover premium to ordinary shareholders. It’s a defining and inequitable feature of the past two decades of conquest at Telecom Italia.

Six gruelling years later, Tronchetti sold the stake to Telefonica and a group of banks, having lost $4 billion of Pirelli owners’ booty. The Spanish telecoms giant fared no better. With Rome resisting foreign control, and Telecom Italia’s operations deteriorating, Telefonica in 2015 sold a large chunk of its stake to Vivendi as part-payment for a Brazilian business.

Thus began the creeping viceroyship of Bolloré, who built up a 24% shareholding. The fate of the latest takeover attempt will depend in part on the French tycoon. Vivendi is resisting KKR’s offer, unsurprising given it paid over 1 euro per share for its stake. Offering anywhere close to that price would be foolhardy for KKR, given the little wiggle room it has to further increase Telecom Italia’s debt.

Getting a fair price for all shareholders – a feat not accomplished in two decades – will require Telecom Italia’s board to do the right thing when it meets on Friday. That means sanctioning investment banking advisers to initiate a process by which directors can properly evaluate strategic alternatives.

If that leads to a tender offer open to all shareholders, Bolloré will not be able to prevent KKR or another bidder from securing a majority. Better surely to join the consortium, participate in the breakup and cleanup of the business, and share in the benefits without paying the fees that KKR charges its limited partners. Over time, Vivendi might even find a way to trade its shares for some useful content assets.

For Draghi, the message that an above-board sale process for Telecom Italia would send is incalculable. While the prime minister must always balance domestic political gripes about outside investors snagging domestic assets, a more orderly market for corporate control would help Italian entrepreneurs, corporations and ordinary borrowers attract more capital, and at a lower cost.

Then again, Telecom Italia’s past performance could be indicative of future failure. From one over-eager investor to another, the company has been a sure-fire way to lose money. And even KKR is not immune to the odd slip-up. As one KKR backer boasted, this would be the biggest leveraged buyout since TXU, the Texas utility that went private in 2007. It later became one of the top bankruptcies in U.S. history. KKR wrote off its $4 billion investment. Telecom Italia’s curse has not yet lifted. Reuters