On Monday 22nd November, American private equity firm KKR began the process of a 33 billion USD offer for Telecom Italia (TIM), Italy’s largest communications company by revenue that provides telecom, mobile and data services. This price represents a 45% premium over the price of the company’s stock before the offer. The share price of the group has risen approximately 30% since rumours of a buyout began circulating the previous week. The offer values the company at an equity value of 10.7 billion USD, with the group having approximately 22.5 billion in debt.
If KKR’s proposed offer is successful, the transaction would be one of the largest European private equity buyouts ever. The valuation towers over the current largest deal since 2007, where in February 2020, German conglomerate ThyssenKrupp AG sold its elevator business for 17.2 billion EUR.
This offer is the latest in a long line of tussles for the ownership of the company. Vivendi, a French media conglomerate, and activist fund Elliot Management engaged in a fight for control of the company which began in 2015. Telecom Italia has also been the failed acquisition target of both US telecommunications company AT&T and Spanish company Telefónica. Vivendi still owns approximately 24% of Telecom Italia but has denied that it is in talks with KKR, with the firm stating that “Vivendi is a long-term shareholder and we want to work with the government and other institutions to get Telecom Italia back on track”. The French media group say that the 10.7 billion USD offer is too low, considering they paid about twice as much per share for their first stake in TIM in 2015. One key factor that has held up previous buyout attempts is the Italian government’s holding in the company, which allows them to veto a takeover attempt.
TIM has struggled in recent times with the competitive nature of the European telecommunications market, which makes up 80% of the revenue for the company. They have issued multiple cuts in profit expectations in 2021, reflecting worsening market conditions. Market forces also forced them to delay a goal to acquire market share in their domestic service revenues. In the third quarter of this year, the group announced a 7.6% year-on-year fall in adjusted earnings to 1.46 billion EUR, which was just below analyst estimates. This has resulted in a share price that has declined over 30% in the past 5 years for the business. This presents an opportunity to a private equity buyer, who sees that value can be realised in the sale of more profitable areas of the business.
The proposed offer has also created turbulence within Telecom Italia and its boardrooms. On 26th November, Luigi Gubitosi, TIM’s fourth CEO in 6 years, resigned from his position due to a confrontation with Vivendi. Gubitosi cited his reason for resignation as not wanting to create any issues that would sabotage the negotiations between KKR and TIM. The now-former CEO denies suggestions that he is friendly with KKR, having previously worked with them during their purchase of 37.5% of FiberCorp, TIM’s ultrafast grid operator, for 1.8 billion EUR. Pietro Labriola, CEO of TIM’s Brazilian subsidiary, has been named as general manager for the time being to ensure the group maintains smooth operations.
The politics of the deal, however, do not end with boardroom spats, as Mario Draghi, Prime Minister of Italy, has expressed the opinion that the KKR deal would be widely beneficial for the country. It is believed that KKR met with the Prime Minister in Rome earlier in November, where he gave the investors the green light. The Italian Finance Ministry issued a statement stating that the bid came from “a qualified institutional investor” and that “Those investors’ interest in making investments in important Italian companies is good news for the country”. However, Draghi will not want negotiations to result in a clash between KKR and Vivendi, as this could create political opportunities for populists in the country.
Ultimately, the Prime Minister’s support may mean that the Italian Government’s decision may longer be a factor that can hinder the success of the takeover. However, Vivendi’s actions have demonstrated they will fight against KKR’s offer if they believe that it is not in their or the company’s benefit, with it not being the first time they have actively defended their stake and interest in the company. TIM is a complex company, with a large debt pile and operations that are critical to Italian infrastructure. KKR managing to accomplish a takeover may only be the first of many hills to climb if it is to turn around the fortunes of Telecom Italia.
By Archie MacKechnie
Sector Head: Hortense Comon