Telecom Italia: good deal was arrived at through flawed process

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Does the end justify the means? That question has long preoccupied theologians and philosophers. It may also have been weighing on the minds of Telecom Italia’s board members this weekend.

Their decision to press on with the sale of TI’s network to KKR — valued at up to €22bn — makes good business sense. Yet, by accepting the offer without putting it to shareholders including Yannick Bolloré’s Vivendi, TI is storing up trouble. The French group has already said it will contest the move in court.

It is not hard to see why TI is so keen on the bird in its hand. The group is highly leveraged, with almost €26bn of net debt before adjusting for leases, or 4.4 times expected 2023 ebitda. The transaction will bring debt down to manageable levels. That should be around twice the ebitda that remaining activities — the so-called ServiceCo — are expected to generate. 

Despite its air of desperation TI has squeezed a respectable sum out of KKR. The transaction with the US buyout group values NetCo at a floor price of €18.8bn. This might rise to €22bn if conditions are met. That implies ebitda multiples in double digits, according to analysts at New Street. Not bad, considering the need for huge network investment. 

Yet, while this looks like the right deal for TI, the manner of its execution is troubling. By pushing the transaction through without a shareholder vote, it has denied a say to Vivendi, which owns 17 per cent of TI’s share capital and controls 24 per cent of the voting rights.

This would not be permissible in the UK. Deals that are a quarter or more of a company’s size by assets, profits, market capitalisation or capital, automatically require a vote.

In Italy, rules appear hazier. The board believes it has acted within its rights. It argues that the sale and leaseback of an asset, even a big one, does not fundamentally change the nature of the company. Vivendi clearly disagrees.

Law courts will decide the point. Given the uncertainty that the legal process creates, it would have been better if TI had polled its shareholders in the first place.

This Lex note has been amended to correct the size of Vivendi’s shareholding in TI and its voting rights.