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For much of this century, the Italian telecommunications group TIM was often considered an underperforming company. It was loaded with too much debt, it struggled in a highly competitive domestic market and it was plagued with management quarrels and political interference from Italian governments of all stripes.
Heading into the new year, however, executives at TIM will have reasons to be cheerful.
The group’s largest shareholder, French conglomerate Vivendi, asked a Milan court last month to overturn the board’s decision to split the business and sell the network to private equity group KKR without a shareholder vote. But Vivendi stopped short of requesting the judges to put the deal on hold in the interim. This essentially means that the plan will go ahead despite the French company’s complaint.
The deal is expected to give some respite to the sector, potentially fostering consolidation within Italy’s and Europe’s fragmented telecoms market. Analysts believe mergers and acquisitions are the only way forward to solve low profitability issues and boost network investments.
Debt-laden TIM, formerly known as Telecom Italia, trades at a significant discount to its peers. Its net debt in March stood at €25.8bn. It is now on its sixth chief executive since 2016 — equal to the number of Italian governments in the same period.
The CEOs have failed to find viable alternatives to the break-up for a business that employs thousands in Italy, where it is deemed a strategic national asset over which the government can veto takeover deals. Now, TIM needs to refinance between €3bn-€4bn of debt a year. And it faces an expensive upgrade of its copper network to fibre.
Chief executive Pietro Labriola has candidly admitted that with interest rates rising the company could not afford such costs. In 2021, Telecom Italia issued three profit warnings; in 2022 it took a €2bn impairment charge; and in the first nine months of this year its interest payments have risen to €1.3bn, wiping out its margins over the period.
Splitting the network from the services business is a last resort option, something no other big European telecoms group has done. “We took the company apart and put it back together like a Lego set multiple times to see if there were other ways forward and there weren’t,” Labriola told the FT in November.
Continuing to kick the can down the road was no longer an option. It is understandable that Vivendi, which has lost substantial money on paper on their investment, and many across Italy’s establishment dislike the solution. But “a rational approach for what was a failing business was needed”, said one Italian official who asked not to be named. Labriola thinks some of its continental competitors might even follow suit in dividing up their business.
The weakness of European telecoms stocks reflects their fragmentation and the lack of alignment between companies’ business models and technological evolution in a context of lower revenues and higher competition, analysts say. In 2018, Citi bankers wrote: “Investors’ backing for the legacy telecom business model, centred on monetisation of existing infrastructure assets through vertical integration with services, may be fading.” Not much has changed since.
Last week France’s Iliad proposed a takeover of Vodafone’s Italian operations, a revamped version of an offer previously declined by the UK-based group. The deal would create Italy’s largest mobile operator with a 35 per cent market share, according to analysts. Vodafone was said to be considering several options, including a potential tie-up with Swisscom-owned Fastweb in Italy.
If the Italian case were to bring about a broader discussion, including among European regulators, on the needs for continental consolidation it would also be welcome news, experts say. Analysts and investors have been critical of the EU’s competition authority for “not being pro-deals”, but it is nearing the end of its five-year term, with European parliament elections set for June.
“In 2024 we can expect consolidation, especially in countries where the sector is losing money,” said Mediobanca’s equity analyst Fabio Pavan. After all, Europe has more than 100 operators — some are local subsidiaries of larger groups — and that is a huge number compared with the US and China, where the market is contested by a handful of companies.
silvia.borrelli@ft.com
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