Q & A-Why is Telecom Italia caught up in the excitement of the offers?

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MILAN: US private equity firm KKR submitted non-binding proposal https://www.reuters.com/markets/deals/telecom-italia-board-meet-sunday-kkrs-takeover-proposal-sources-2021- 11-21 will privatize Telecom Italia (TIM), valuing the former Italian telephone monopoly at 33 billion euros (37 billion US dollars) including net debt.

KKR is the latest investment company to get involved with TIM, of which French media group Vivendi is the first sole shareholder.

WHY NOW?

KKR already has its skin in the game, having spent € 1.8 billion for a 37.5% stake in TIM’s last mile network reaching people’s homes.

Italy lags behind other countries in the European Union in providing fast broadband services to individuals and businesses, but is preparing to deploy € 6.7 billion in stimulus funds from the EU to speed up their deployment.

Redburn analysts calculate a gap of around 10 million high-speed lines between Italy and the UK, which have a similar population, indicating “an incredible potential increase of 65% in the size of the market”.

Italy’s broadband strategy includes incentives for telecom operators and vouchers for small and medium-sized enterprises (SMEs) using broadband services. TIM expects 500 million euros in SME checks to start going out soon.

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COULD ITALY STOP THE KKR IN ITS TRACK?

The Italian government, led by Prime Minister Mario Draghi, has said its stance on KKR’s proposal will depend on plans for TIM’s infrastructure assets.

Italy has “golden powers” to protect strategic companies like TIM from unwanted foreign interests.

However, the government hailed KKR’s interest as good news for Italy, setting up a special committee to oversee the progress of the bid.

TIM’s fragile finances and the plight of its 42,500 domestic workers have long been a concern for the government, which is hungry for investments to modernize the country’s main grid.

WHAT ABOUT TIM’S FINANCES?

TIM is crippled by a debt burden equal to about four times its basic profit, the legacy of an ill-fated privatization more than two decades ago followed by debt-fueled takeovers.

Like other telecom operators, TIM is grappling with depressed market values ​​due to the heavy investments facing the industry. Fierce home price competition compounds the challenge, leading to a 17% drop in income over the past five years.

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To boost broadband adoption, TIM CEO Luigi Gubitosi struck a football rights deal with streaming group DAZN, which costs TIM € 1 billion over three years, but its initial performance are below expectations.

AND VIVENDI?

TIM’s first investor spent an average of 1.07 euros per share to build up its 24% stake, which it carries on its books to 0.83 euros. The KKR offer, equivalent to 0.505 euro per share, exposes it to a large capital loss.

However, as part of KKR’s plan to separate TIM’s infrastructure assets from its services, Vivendi could partner with the services arm to provide content and pursue its plan to build a media group in Europe in the Middle East. South.

Vivendi disagrees with Gubitosi who was brought in by rival investor TIM Elliott in 2018 and is pushing to oust him to have more leverage on strategy.

Gubitosi’s future will once again be in the spotlight at a board meeting scheduled for Friday.

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WHAT COULD HAPPEN TO TIM’S ASSETS?

TIM’s debt burden makes it likely that KKR will pursue a rollback strategy to recoup its investment.

KKR is looking to part ways with TIM’s fixed-line business to create an open access infrastructure group that is third-party controlled by public investor CDP, like Italian gas or electricity grids, two people close to it said folder.

State control of the grid could help overcome opposition from EU competition authorities to Italy’s single grid plan, the people said, removing the main obstacle to a proposed merger between the network assets of TIM and those of the competing fiber group Open Fiber controlled by CDP.

Mediobanca Securities calculated the value of TIM’s assets, comprising its domestic fixed and mobile businesses, a Brazilian unit and a tower unit, data centers, at 26 billion euros before factoring in the company’s debt. .

(US $ 1 = € 0.8911)

(Reporting by Valentina Za and Elvira Pollina; Editing by Keith Weir, Kirsten Donovan)

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