|17 June, 2019

Rome can get edge on Paris with network M&A

A potential merger of Telecom Italia with rival broadband operator Open Fiber could revive the telco’s fortunes

he Telecom Italy logo is seen at the headquaters downtown Milan, Italy, March 10, 2016. REUTERS/Stefano Rellandini

he Telecom Italy logo is seen at the headquaters downtown Milan, Italy, March 10, 2016. REUTERS/Stefano Rellandini

MILAN - Rome can get an edge on Paris with some savvy telecom dealmaking. A potential merger of Telecom Italia with rival broadband operator Open Fiber could revive the telco’s fortunes. The appeal for the government, an indirect shareholder in both, is to secure control of the former monopoly, and dilute its largest shareholder, France’s Vivendi.

The deal would be the latest twist in a long-running saga over the future of Telecom Italia that has for over a year pitted Vincent Bolloré’s media group Vivendi – which has a 24% stake – against Paul Singer’s activist fund Elliott Advisors, which owns nearly 10%. The Italian government, which always disliked Bolloré’s swoop on its dominant operator, last year deployed state investor Cassa Depositi e Prestiti (CDP) to buy 10% of Telecom Italia and back a boardroom coup led by Elliott.

Elliott has proposed to spin off Telecom Italia’s fixed-line network, a prelude for a possible later merger with government-controlled rival Open Fiber. That project was meant to reduce the telco’s 25 billion euro debt pile. Instead, the plan now seems to be for Telecom Italia to buy Open Fiber directly. The company, which is jointly owned by CDP and state utility Enel, is building a broadband network that competes with Telecom Italia.

The appeal for Telecom Italia is easy to see. Open Fiber is still loss-making, but hopes to grow quickly, targeting 500 million euros of EBITDA in 2022. It could one day challenge Telecom Italia’s dominance. A deal would eliminate competition and reduce investment duplication.

It would also serve Italy’s strategic purposes. Since CDP is an investor in both Telecom Italia and Open Fiber, an all-share merger would boost the state’s influence over the telco and dilute Vivendi, depending on the value of Open Fiber and number of new shares issued. Assume Open Fiber’s equity is valued at 2 billion euros, and CDP’s stake would rise to 19%, on a level with Vivendi, a Breakingviews calculation shows. At 2.5 billion euros CDP’s shareholding would rise to 20%, and Vivendi’s fall to 18%.

It’s not a done deal. Enel also would need to be persuaded to sell, but CEO Francesco Starace may want a higher price. One solution might be for just CDP to first sell its stake in Open Fiber to Telecom Italia, and Enel sell later. But that could mean fewer savings, and initially less dilution for Vivendi. Business rationale and national interest will probably prevail.

CONTEXT NEWS

- Italian telco operator Telecom Italia, under the leadership of CEO Luigi Gubitosi, is considering a tie-up with smaller broadband provider Open Fiber. The deal may involve Telecom Italia’s buying a stake in the operator, according to several Italian newspapers.

- Open Fiber is 50%-owned by Italian state investor Cassa Depositi e Prestiti (CDP), with the rest in the hands of state-controlled utility Enel.

- Vivendi is Telecom Italia’s top shareholder with a 24% stake. CDP owns nearly 10% of Telecom Italia’s ordinary shares, with activist fund Elliott Advisors owning a similar amount.

- Elliott took a stake in Telecom Italia in 2018 and has been campaigning for a separation of the dominant operator’s network.

- Italian newspaper La Repubblica said on June 11 that Telecom Italia and CDP have agreed on a price of 2 billion euros for Open Fiber.

- Open Fiber, launched at the end of 2015, is yet to break even.

(Editing by Neil Unmack and Bob Cervi)

© Reuters News 2019

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