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With a crash or a bang, the party at Telecom Italia will soon be over. The fate of the heavily indebted former state monopoly rests on the sale of its landline network to private equity group KKR for up to €22bn.
Championed by chief executive Pietro Labriola, the deal would cut debts by about €14bn and give the group now known as TIM a chance to participate in sector consolidation. Good news for Italy, less so for the hedge fund community, which would stand to lose a record near €1bn short bet.
TIM’s deal with KKR is expected to be completed by August and will be tough to stop. That does not mean belligerent opponents will not try. Top of this list may be Vivendi, the billionaire Bolloré family’s holding company, which has voiced its opposition over the price KKR will pay. It has also bemoaned the lack of a shareholder vote on the disposal. Legal action is under way. A shareholder meeting to elect a new board at TIM at the end of April would offer an earlier chance to disrupt proceedings.
Short sellers are counting on it. When Labriola presented a business plan update at the start of March, the shares crashed by a quarter on the day of publication. Daily trading volumes hit a record high. The Financial Times later revealed that a fifth of the group’s shares were out on loan to short sellers in March, the highest proportion since 2005.
Votes for the board will be critical. Vivendi, which controls almost a quarter of the votes, has not put forward its own list of nominees. Activist funds Merlyn and Bluebell have.
Merlyn does not contest the KKR deal but wants to go in a different direction after it is completed, with further asset sales such as TIM Brasil. Bluebell would scrutinise the deal and is taking a position that appears to be aligned with Vivendi.
If the deal is scuppered, only those shorting the shares would be winners. TIM would have to find alternative means to tackle its debt pile. No doubt the share price would fall further.
Vivendi and Bluebell both want a higher price for their shares. Without a competing offer to that of KKR, a path to value is hard to imagine.
Vivendi has already lost about €2.5bn of value on its investment since 2015. Shareholders should resist the urge to join its side. Rocking the boat at this stage is only going to mean further losses.
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