Italy’s government mulls taking bigger stake in shrinking TIM

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The government is keen to see the long-discussed tie-up between alternative broadband fibre provider Open Fiber and the former incumbent as TIM continues with sales of its assets.

Italy’s Prime Minister, Giuseppe Conte, said the government could raise its stake in Telecom Italia (TIM) to help push through a merger with Open Fiber.

The merger of the two has been discussed for years, but differences of opinion regarding the value of assets, the structure of combined entity and its governance plus regulatory issues have prevented progress.

The government holds an interest in both through the state-backed bank, Cassa Depositi e Prestiti (CDP).

Shifting stakes

Open Fiber is a joint venture between CDP and energy firm Enel. The Australian investment fund, Macquarie, is keen to acquire Enel’s shareholding.

Italian MP Beppe Grillo recently called on CDP to increase its interest in TIM (from 10%) to around 25%, about the same as the current largest shareholder in TIM, French conglomerate Vivendi of France.

The idea is that the CDP could act as the “pivot” to bring TIM and Open Fiber together to create a nationwide broadband infrastructure operator. As such, it could lease capacity to other service providers on an fair basis.

The PM responded to Grillo’s suggestion, saying, “[The] idea is good … it is one of the options we may consider,” according to Reuters.

Profitable but struggling?

It’s not surprising that as a shareholder the Italian government is mulling action. TIM’s Q1 figures reported an impressive operating margin, rising from 43.5% a year earlier to 43.8%, but that success is driven by major cost cutting and the divestment of its towers, rather than growth.

Profits were up by €600 million after the divestment of its towers in Italy. Overall, revenues fell by 8.4% to slightly below €4 billion while operating profit dropped 18.2%, to €533 million.

The fixed-line business lost 185,000 retail lines and 48,000 wholesale lines in the first quarter, although its broadband figures rose, broadband customers are spending11.5% less, at €25.60 on average, compared to the same period last year. 

By the end of March, the operator had reduced its net debt to figure had fallen to about €21.7 billion and once it concludes deals with Arcadian and KKR, the operator expects they will fall €17.7 billion, which is low for a major European telco group.

Pending deals

A consortium led by French private equity firm Ardian expects to concude the deal any day now to buy almost half of TIM’s 33.2% stake holding in INWIT, the holding company for its tower infrastructure.

In February, TIM named KKR as its exclusive partner to deploy ultra-fast broadband and help it compete better against fibre-only rival Open Fiber as merger talks between the two had stalled. The deal remains attractive for all parties if the merger with Open Fiber finally goes ahead.

KKR also expressed an interest in buying a 42 to 43% of TIM’s last-mile, mostly copper network – which values that infrastructure at €7 billion to €7.5 billion. In March, TIM announced its intention to sell a minority stake in some of its fixed-line assets KKR & Co. for about €2 billion.