by Fernando Napolitano
Newest CEO Fernando Napolitano analyzes the background and implications of a US private equity firm buying the Italian telecommunications giant.
KKR-TIM
Is it a ballon d'essai to test the wind, or a serious intention to challenge the raison d’état, the resolve (and vision) of the state?
The American fund KKR has announced its interest in a friendly acquisition of 100% of TIM at a 45% premium vs the November 19 closing price. The deal has a value of $37bn, of which 33% is the equity value of TIM. It is the leading Italian telecom operator, and it streams TV services including Serie A soccer. KKR, a $400bn fund, already holds a 37.5% stake in TIM’s fiber network FiberCo, the so called “last mile”. FiberCo is replacing the copper with fiber to connect homes.
A look at the different components that the Italian government must consider and analyze will help to appreciate the complexity and assess the potential feasibility of the KKR offer.
KKR approached KPN, the Dutch telecom operator, with a takeover offer which was rejected this year, and so are keen for acquisitions. Since the KKR-TIM operation has political, domestic and international dimensions, KKR has stated that it will move ahead only with the approval of the Italian government led by Mario Draghi. TIM is a strategic national asset, and so the government exercises power – the golden power-- of approval. It can veto the deal or impose conditions on any acquisition. TIM forms an important part of the network that connects most Italians to the internet and to the world. As pertinent in this case, it also connects aspects of the security apparatus, so engaging a key consideration: National Security. For those reasons, an ad hoc government committee has been set up to make a decision. Awaiting that, the TIM board has met without deliberating the KKR offer, which expires in four weeks.
Mario Draghi’s government has the confidence of the Italian parliament, and he serves at its pleasure. His majority is composed of all political parties except one on the right, Fratelli d’Italia. On January 2022, there will be an election to choose the President of the Italian Republic. The upper and lower houses members as well as the representatives of the Italian regions will cast their ballots. Mario Draghi is one the key candidates. His election, most likely, implies the fall of his consensus government and new general elections in the spring of 2022. As President of the Republic, Mario Draghi would lose the control over such matters as the implementation of the European €250 bn recovery plan, some of which increases the already large Italian public debt, currently at 160% of GDP. Europe is concerned. The legislature’s session is set to end in 2023. Should he decide to remain Prime Minister he must retain the confidence of the Parliament, and some members of his current coalition have already declared their opposition to the TIM acquisition by KKR.
Furthermore, Europe has its industrial challenges and remains subscale in global competitive terms. The largest European company by market capitalization (MC) is the luxury good French conglomerate LVMH, $411bn in MC in 18th position, the second is the food company Swiss Nestle at $357bn, ranking number 24 worldwide. These are important multinationals, other industries, though, make a difference in terms of leading-edge know-how in defense, R&D, pharma, electronics, sw, … digital and geopolitical influence, assuming these players can achieve dimensions to compete at par with US and Chinese powerhouses. The first German company is SAP that ranks 83 with a MC of $157bn. Deutsche Telekom is as large as US Booking.com, at $94bn. No European financial institution is in the top world 100 by MC. The first European bank is, in fact, BNP Paribas in 198th position at $82bn. In comparison, US JP Morgan ranks 12 at $485bn. Apple, Amazon, Microsoft, Alphabet and Tesla, all US companies, are above $1000bn in MC. The first Italian company is ENEL at $74bn in MC and number 208 in the world. Europe is affected by diminution.
In relation to telecoms scale, the 62 million Italians enjoy 5 telecom operators – TIM, Vodafone, Wind, Fastweb and Iliad. In the United States, 320 million Americans enjoy the services of three nationwide wireless services - Verizon, AT&T and T-Mobile.
European governments are aware of this scale challenge for continental industries, and political discussions are ongoing. Ambitiously, this includes the idea of a common defense system launched by the French President Emmanuel Macron in 2018. The “Strategic [military] independence” of Europe has become since the buzz word across European political elites. American reaction ranges from skepticism to concern to a cautious welcome.
There is also the Italian-French relationship. France is among the top investors in Italy, with $140bn in acquisitions since 1996, according to Dealogic. In the telecom sector, French Vivendi holds important stakes above 20% in both TIM and Mediaset. Mediaset is the leading media company in Italy, Spain and, as of late, in Germany with the acquisition of 24% of ProSiebenSat.1. Vivendi’s MC is $13bn, while that of TIM is $11bn and Mediaset $4bn. Both Mediaset and Vivendi have competing plans to scale their operations in Europe. In that context, Vivendi has declared the KKR offer not sufficient, particularly since a successful buyout would, at least for a period, severely hamper Vivendi’s European ambitions.
Furthermore, despite a recent rapprochement with US President Joe Biden, France is still smarting from the September 2021 AUkUs announcement. Presidential elections in France are next year and such shocks are not welcome. To enter a trilateral security pact between Australia, the United Kingdom and the United States for the Indo-Pacific region, Australia unilaterally and without notice cancelled the previous French–Australian submarine deal, worth $67bn when signed in 2016. The project was reportedly going to employ 4,000 people in France over six years. French foreign minister Jean-Yves Le Drian called the pact a "stab in the back." France recalled its ambassadors from Australia and the US, which was in turn a shock. Despite tension in the past, France had never before withdrawn its ambassador to the United States.
Such calibrations drive industrial considerations, a different measure than that of value creation for funds’ shareholders. Funds, notoriously, are obliged to provide hefty returns to investors. Since there is no magic wand, funds often look to break up businesses, such as separating the networks from the consumer businesses, in efforts to improve the specialized performance of the companies and so realize added value. If the TIM deal goes through, the management appointed by KKR will likely do exactly that.
Furthermore, specific to the network, if the goal is to have a public and neutral network -- i.e., independent from the former incumbent -- TIM must be acquired in its entirety. FiberCo, the fiber last mile company, is a private company embedded into TIM that holds 60% share of it. Today a “market” price to access the network is unchartered waters. No former incumbent in continental Europe has separated the network from the service provision. Open Access by British Telecom, which to the contrary did that, wasn’t precisely a success story. Surgically cutting this cordon—services from network--, would most likely project a scenario with reduced employment that should be carefully analyzed. Unions in Italy have voiced their concerns.
There will be no deal without Italian state approval. The market has some doubts, since on Monday the 28% rise in the share price was below KKR’s offer. KKR is most likely very interested in FiberCop that generates 15% of TIM’s EBITDA.
Under the appealing slogan ‘Next Generation EU’, Europe has, for the first time in the history of the Union, raised a common debt to relaunch the constituent economies following the pandemic. The €750bn plan is a compromise between the €1000bn requested by countries such as Italy and Spain, and the €500bn proposed by France and Germany. All leaders claim, and rightly so, to be focused on a better Europe for future generations. Among the important actions that should be undertaken, Europe and its governments must create the conditions to incentivize industrial players to augment their scale and financial robustness to grow the economy, create jobs, enhance know-how and education to compete with the US and China. This industrial dimensional growth will also contribute to have a more relevant Europe geopolitically. It is part of the opportunity, after years of passive abdication to market forces, for a revitalized political leadership to exercise a long-term shared vision which includes effective intermediation between the needs of capital and the prosperous, inclusive well-being of the general population.
There is also the headquarters consideration. Headquarters, the location of top management and governance, contribute to the communities that host them significantly more than subsidiaries. Headquarters collect and distribute net profits, and are more generous contributors to general welfare, from restaurants to museums, from R&D to better Universities. TIM remains the last telecom company with headquarters located in Italy. Others are “subsidiaries” whose headquarters are elsewhere: China, France, Switzerland and the UK, and that is not without risk.
For Mario Draghi, the opportunity has a historical dimension. When Telecom Italia went public in 1997, he was the director general of the Ministry of Treasury. He still held that post in 1999 when he witnessed an unknown and aggressive Italian raider launching a hostile takeover of Telecom Italia, engineering a highly leveraged buyout of $31bn. That debt (today at $25bn) mutilated Telecom Italia despite several changes in ownership and management. Most importantly, it deprived Italy to this day of proper telecom infrastructure, investments and economic growth.
Fernando Napolitano November 25, 2021
CEO Newest
New York