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Telecom Italia has so much debt it can’t afford to invest and move forward as a business. The interest burden on its €31 billion ($33 billion) of gross borrowings will only get worse as these reprice in a higher rate environment. So the company needs to raise cash either from shareholders or the sale of assets.
An equity injection looks like a tall order. Net debt was about five times earnings before interest, tax, depreciation and amortization at the half-year stage. To bring that down to a more manageable level would require raising more than the current €5.5 billion market capitalization. Yet asking shareholders to commit perhaps as much as double the value of their current investment would be a big ask.
As for disposals, the only sizable option is the so-called NetCo, which houses the fixed-line network linking exchanges to street cabinets and then to consumers’ homes. Hence the long-running auction culminating in KKR’s binding offer. Terms weren’t disclosed but KKR has valued the NetCo at €23 billion including a small asset now part of a separate negotiation, Bloomberg News reported.
A sale would leave Telecom Italia as a slimmed-down customer-focused service company focused on Italy and Brazil. At home, this would compete with the likes of Vodafone Group Plc, negotiating its own arms-length agreements to access the network accordingly.
The attractions for KKR are plain to see. Its funds would gain a chunky infrastructure business that, with investment, has obvious potential to generate sustained, inflation-linked cash flow. The cherry on top would be a potential merger with Open Fiber, the rival domestic broadband network, to establish a regulated high-speed broadband monopoly.
The decision facing Telecom Italia’s board isn’t quite as clear cut as it looks. It may have flushed out the market price for NetCo, but the directors must nevertheless decide whether the remaining Telecom Italia would be financially strong enough to be viable in a very competitive market. All the same, the KKR offer appears to be at a notable premium to where several analysts value the network asset, with New Street Research seeing fundamental worth at €15 billion.
Vivendi has voiced concerns about the price and structure of any NetCo exit. If the French media company is unhappy with the price the process has delivered, its options appear limited. True, it has a 24% stake. But it’s not clear a final transaction would require shareholder approval, so to block it could require litigation to force Telecom Italia into holding such a poll. Pushing for a rights offer also looks challenging given the sheer scale of shareholder support required.
Moreover, opposing the NetCo sale means going head-to-head with Rome: The government isn’t just backing KKR’s bid, it’s participating as a co-investor.
That leaves the radical option: seeking buyers to take Telecom Italia private. Logically, shareholders who think KKR is getting a steal ought to be cobbling together a consortium to take this company off the market entirely. Given financing conditions, and Telecom Italia’s stretched balance sheet, such a mammoth deal looks harder today than when KKR itself unsuccessfully attempted the challenge in late 2021. Getting it done would require a big equity check and possible sovereign wealth fund involvement, as well as a generous buyer for the NetCo.
Credit is due to Vivendi. Its resistance thus far to KKR is doubtless a factor in the buyout firm’s offer getting to the level it’s at. But achieving more for itself and other Telecom Italia shareholders from here will require more than just saying no.
More From Bloomberg Opinion:
• UK Capitalism’s Real Scandal Is What’s Tolerated: Matthew Brooker
• Poland’s Populist Playbook Didn’t Work This Time: Lionel Laurent
• Giorgia Meloni’s Culture Wars Keep Debt Off the Front Page: Rachel Sanderson
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
More stories like this are available on bloomberg.com/opinion
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