Telecom Italia: Will Council Renewal Solve Changes Help Loop?

Luigi Gobitossi pledged to make Telecom Italia a “normal company” capable of implementing his recovery plan when in 2018 he became its fifth CEO in six years.

Instead, his three-year anniversary was marked by his resignation, having failed to live up to that simple ambition and a week of drama after the Italian telecoms group received a €33 billion takeover offer from US private equity firm KKR.

In a letter to the board of directors before an extraordinary meeting last Friday afternoon, Gubitosi offered to withdraw to facilitate talks with the US takeover fund. By the end of the day, he was replaced by Pietro Labriola, head of the Brazilian division of Telecom Italia, although his successor has been given the title of general manager and Gubitosi will remain on the board.

“I am very satisfied [with] “Labriola set,” said Rossi.

But with management reform representing neither continuity nor outright discontinuity, the future of Telecom Italia remains unclear as deal-making in Europe’s telecom sector intensifies.

KKR’s show earlier this month sent shockwaves through Italian industry and politics. If successful, the acquisition will be the largest private equity purchase in European history and represents the industry’s boldest attempt to break up one of the continent’s former telecoms monopolies.

The US group had already signaled its interest in telecommunications when it made a surprise bid for existing Dutch KPN earlier this year, but it was turned down.

Telecom Italia is a much bigger prize. But the obstacles to a big deal: among them, uncertainty over whether the Italian government – which owns a roughly 10 per cent stake owned by state investor Cassa Depositi e Prestiti – will agree to the group’s sheer size and sluggish performance, and potential competing bids from other private equity firms. .

The role of Vivendi, Telecom Italia’s largest shareholder at 24 percent, is also crucial. I already considered the price KKR offered, about half the average it paid to build its stake in 2016, according to analysts, too low.

The French conglomerate had planned to push a no-confidence vote in Gubitosi at Friday’s board meeting, according to several people familiar with the talks, out of dissatisfaction with Telecom Italia’s poor performance. Several other board members also requested a meeting to discuss Jupitosi’s future, according to People.

Vivendi and KKR declined to comment.

KKR’s bid follows a difficult year for Telecom Italia. The group has issued two profit warnings in a row, a complex merger plan with rival Open Fiber appears to have worked, and a football broadcast deal with UK-based platform DAZN, pushed by Gubitosi, has not been as profitable as shareholders had hoped. Telecom Italia’s stock is down nearly 40 percent in the period since Gubitosi took charge and before KKR’s bid.

KKR’s bid of €0.505 per share in cash was offered at a premium of 44 percent over the company’s previous closing price, giving it an equity value of €10.7 billion. The telecoms group has approximately 22.5 billion euros of net debt.

Its proposal includes breaking up Telecom Italia and operating the network through a company controlled by Cassa Depositi e Prestiti, which also owns a stake in Open Fiber.

Mario Draghi, Italy’s prime minister, said at a press conference in Rome last week that the government’s priority would be to protect Italian jobs, technology and the network. He has created a working group made up of key ministers to look into Telecom Italia’s options.

“The offer is good news for the country because it means that the mood of foreign investors has changed in a positive way,” a government official said. “But nothing has been decided because there is nothing substantial on the table for us to assess at the moment.”

The government has the so-called “golden power” to prevent a takeover if it is deemed not in the national interest.

The KKR faces stiff opposition from some circles of the Italian parliament, including populist leader Matteo Salvini, and security services who are concerned about the potential sale of strategic national assets.

CEO Luigi Gobitossi pledged to make Telecom Italia a “regular” company when he took over in 2018 © Charlie Bibby / Financial Times

So far, Draghi has refused to intervene directly and there are conflicting opinions within his government about the best way forward, according to three cabinet members. Coincidentally, it includes one of the largest deal makers in European telecom companies – Vittorio Colao, Minister of Innovation and Digital Transformation and one of Rome’s main interlocutors with Brussels.

The former Vodafone CEO has negotiated the sale of the British company’s stake in Verizon Wireless for $135 billion as well as the €19 billion acquisition of Liberty Global’s central European assets. He declined to comment on KKR’s approach.

KKR’s involvement has already garnered interest from rival private equity groups, some of which have also spent a significant amount of time thinking about how to carve out the behemoth and make it private.

CVC said the Luxembourg-based acquisition group CVC Capital Partners and US group Advent International were “open” to discussions, although KKR’s stake in Fibercop, Telecom Italia’s “last mile” network, may complicate matters.

Vivendi has denied having talks with the funds and reiterated its desire to be a “long-term investor in Telecom Italia”.

Olivetti, Deutsche Telekom, AT&T, Telefónica and Vivendi are among the companies that have attempted to buy or control Telecom Italia over the past two decades.

One Italian telecoms executive described the offer as an “alarm bell” for a sector that has struggled to achieve growth.

Telecom Italia’s market cap fell to €7.5 billion before KKR’s bid. This reflects the deteriorating financial performance of a vacant company facing fierce competition in its home market from Vodafone, CK Hutchison’s Wind Tre and Iliad, controlled by French billionaire Xavier Niel.

Revenue in the first nine months of the year fell 2 percent to 11.4 billion euros, but profit before tax fell 85 percent to 167 million euros. Standard & Poor’s cut Telecom Italia’s debt rating below investment grade last week.

Morris Patrick, an analyst at Barclays, said it was still difficult to judge whether KKR’s plans had a better chance of succeeding without more details about its strategy. “The end game is still uncertain,” he said. “A simple acquisition of existing equity will only add debt to the structure, which is not a limitation that T.I. needs.”

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