• TIM (Telecom Italia) is suffering from major boardroom tensions
• Private equity firm KKR believes it can bring stability
• It is proposing a ‘friendly’ all-cash acquisition worth €10.8 billion
• Any takeover deal needs support of Italian government
• Deal would also hinge on spin-out of TIM’s fixed access unit, FiberCop

The board of TIM (Telecom Italia) gathered for a hastily-convened meeting on Sunday 21 November to consider a preliminary €10.8 billion ($12.18 billion) “non-binding” takeover bid from Kohlberg Kravis Roberts & Co. L.P. (KKR), a move that would de-list the operator and make it a privately-held company. 

TIM issued a statement late on Sunday to confirm KKR’s interest and to note that any deal would require approval from the Italian government, which holds ‘Golden Power’ over changes in ownership of the operator.  

The “friendly” move comes after weeks of turmoil at the Italian national operator, which is currently in a state of strategic limbo while also feeling the pressure of tough trading conditions and a heavy debt load. The carrier’s largest shareholder Vivendi (a near 24% stake), unhappy with progress and the performance of CEO Luigi Gubitosi, had called two board meetings in an effort to gather support for changes in strategy and management: Gubitosi survived the first meeting, held on 11 November, and the next was set to be held on Friday 26 November, Reuters had reported. 

Now, though, US investment firm KKR has stepped into the fray, seemingly in an effort to end the boardroom fighting and instil certainty, with a proposal to acquire the entire Telecom Italia group for cash with a bid worth €0.505 per share: TIM’s share price ended last week at €0.35 and has gained 27% in Monday morning trading on the Milan stock exchange to hit €0.44, which reflects the potential of a deal but also the hurdles it faces. 

KKR is already involved with TIM, having invested €1.8 billion for a 37.5% stake in the operator’s fixed access line division FiberCop in April this year. KKR would like to see FiberCop merged with Italian national wholesale fibre network operator Open Fiber to create a single national wholesale broadband access player called AccessCo, as had been planned last year. However, that merger plan has stalled in recent months due to competition concerns and a lack of political support from the administration of Mario Draghi, who became Prime Minister in February.

Various reports suggest KKR would pull the stops out to make that deal happen, which would likely involve TIM not having a majority stake in AccessCo as had been originally planned. It’s also likely that KKR would also explore other options to monetize other assets and units of the TIM portfolio, which currently includes important operations such as international carrier Sparkle, an indirect stake in Italian towers player INWIT through a joint venture holding company called Daphne 3, IoT and enterprise IT specialist Olivetti, cloud/edge services unit Noovle, and cybersecurity specialist Telsy, as well as the telecoms operations in Italy and Brazil. 

Cashing in on some assets to reduce debt might be one of the key focus areas for KKR if it was to be successful with its bid: TIM is currently carrying €22.2 billion in debt (though this is €3.3 billion less than a year earlier, so progress is being made to cut it), and the operator continues to report year-on-year falls in revenues and earnings, although it predicts a reverse of that trend for 2022 and 2023: In the third quarter of this year, TIM generated revenues of €3.84 billion, down 2.1% from a year earlier, while earnings before taxes and various costs came in at €1.7 billion, down 5.9%. 

But it seems KKR might face some competition, as various local reports suggest CVC Capital Partners and Advent International might also seek to form investor groups that could table rival bids. 

Ultimately, though, the near-term future of TIM, which needs stability and certainty to execute on its currently capex-heavy plans, will rest with the Italian government, which has the power to block any attempt to take control of TIM. If KKR can convince the Draghi government that its intentions and plans would result in a strong and secure TIM and a national broadband wholesale network operator that would help the country’s digital plans, then this offer could make it to the next stage.  

- Ray Le Maistre, Editorial Director, TelecomTV