The board of debt-laden Telecom Italia (TLIT.MI) approved on Sunday the 19 billion euro ($20 billion) sale of its fixed-line network to U.S. private equity firm KKR (KKR.N). This deal will make the former phone monopoly the first telecoms group in a major European country to part ways with its landline grid. It also marks a milestone in Chief Executive Officer Pietro Labriola’s plans to revive the junk-rated company, which can no longer afford the expensive investments its aging grid needs. The grid is a critical asset that Italy deems of national strategic importance as the country works to bridge its digital divide with the rest of the European Union, and its sale will help to ensure it remains fully operational.
The 11-3 board decision to sell the network to KKR is a blow for Vivendi (VIV.FR), the French media giant with a 24% stake in TIM, and was expected to spark legal drama. Vivendi has opposed the grid disposal and said it would seek to block the transaction in court, saying it lacked a clear rationale and that an extraordinary shareholders’ vote should have been required. The board dismissed, as not in line with its strategy, an alternative plan pitched in recent weeks by investment advisory Merlyn Advisors, which the company described as a “disruptive proposal.”
KKR’s bid to buy the network is structured as an acquisition of TIM’s NetCo unit and is expected to be finalized in the second half of 2021, the telco said. The offer is backed by the Italian government, which will retain a degree of oversight over an asset it has long insisted is strategic while enabling TIM to cut its debt load. The government would get a 20% stake in NetCo, which could increase to 30%, and it has set aside up to EUR2.5 billion to invest in the company.
TIM’s move is widely seen as a crucial step in its attempts to reduce debt by spinning off assets such as its cable unit Sparkle and a sizeable domestic business. The company’s debt-to-EBITDA ratio stands at over 1.2 times, well above the level that many analysts consider sustainable. The network sale will also allow it to reshape its business to focus on marketing and selling mobile services while leaving behind the grid, which will handle digital, ultra-broadband operations. It also expects to slash its financial debt by around EUR14 billion. KKR’s bid comes with a high earnout component of 15% of the net value, which limits its attractiveness for investors, as does the absence of a possible sale of its submarine cable unit. Its current value is around EUR18.8 billion. The deal is expected to close in the summer of 2024 and should give TIM a significant cash boost. Reuters reported in December that the sale could be delayed if Vivendi files a legal challenge in an attempt to force an extraordinary shareholders’ meeting.
