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TIM splits off network and sells towers

TIM plans to split its business into two separate legal entities, a move that will likely help it fend off a takeover bid from KKR.

The Italian incumbent made the announcement alongside the publication of a set of full-year financials that showed shrinking revenues and a heavy drop in earnings, and the revelation that it is selling out of its towers business INWIT.

The telco is operating in tricky times, as its numbers show, but those in power clearly believe they have the answer to driving growth and avoiding a – likely undervalued – private equity buyout, but it’s clear from the new plan that attracting new investment into the company remains a possibility in future.

The news of the separation, which will see TIM split into a networks business and a services operation, comes as little surprise, the telco’s board having given new chief executive Pietro Labriola the green light to explore such a move just over a month ago. Under the terms of the scheme, approved by TIM’s board as part of its broader 2022-2024 industrial plan, TIM will separate into two new businesses, currently dubbed ServCo and NetCo.

As the names suggest, ServCo will house TIM’s consumer and enterprise businesses, including mobile networks, data centres and service platforms, and TIM Brasil, while NetCo will be the new home of the telco’s fixed network assets and the Sparkle international carrier unit. Whether the latter will also include the FiberCop fibre-to-the-home (FTTH) joint venture TIM is building with KKR and minority shareholder Fastweb remains to be seen. According to Italian press reports last month, as shared by Reuters, KKR will seek to block any attempt to fold FiberCop, of which it holds 37.5%, into a new network business.

On a related note, Italy’s antitrust watchdog the AGCM recently approved the creation of FiberCop, having accepted the competition-promoting commitments proposed by the entity’s shareholders.

TIM did not refer to FiberCop in its announcement. Nor did it gove much away on the subject of the KKR bid, other than to say that the new industrial plan gives its advisors all they need to assess the PE firm’s offer.

“This analysis will be completed in a timely manner. Once completed, the board will meet to review the respective findings and to decide on the next steps in this regard,” TIM said.

That statement alone gives little indication as to what TIM will do next, but it’s pretty clear that the new industrial plan serves more as an alternative to the takeover bid than something that would sit alongside it. Indeed, Reuters quoted Labriola as telling reporters in Italy that the plan appears similar to that presented by KKR, but would allow the value generated to go to existing shareholders. He also noted that KKR’s interest in the company suggests its value is actually higher than the offer price, which is pretty obvious, but interesting to hear the CEO vocalise that thought.

TIM’s full-year figures will not have done its valuation – or at least its perceived value – any good. The incumbent posted a 3.1% revenue decline in 2021 to €15.3 billion, exacerbated by a 4.1% year-on-year slide in Q4. Its earnings also took a big hit, dropping by 25% last year to just over €5 billion, again impacted by a bigger decline – almost 55% – in the fourth quarter.

The EBITDA decline came from Italy, where falling service revenues and its well-documented underperforming football rights deal with DAZN made their mark, as expected following a series of profit warnings last year. In December the telco said it expected organic EBITDAaL at its domestic business to fall in the “low teens.” The figure actually came in down 14%; whether that’s low or mid-teens is a question of semantics. It’s shooting for a low-single-digital CAGR decrease in group EBITDAaL over the course of the industrial plan, with a “mid to high teens decrease” this year.

There’s more to the numbers than those headline figures, of course. But on the face of it, it’s hard to argue that TIM is ripe for a restructure.

“I am convinced that the evolution we have planned for the group is a positive break with the past,” Labriola said, in a canned statement on the new industrial plan. “The projects we plan to launch for customers and those envisaged by the Digital Agenda and the NRRP require an immediate and strong response: with this new set-up we will be readier to meet the challenges and to seize opportunities ahead.” The NRRP – or PNRR as it is more commonly rendered in Italy – is the post-Covid National Recovery and Resilience Plan that will, amongst other things, make €6.7 billion available for broadband in Italy.

While TIM might be seeking to head off KKR’s overtures, it is not entirely opposed to the idea of external invest; quite the opposite in fact.

“The new set-up will improve visibility of the operational and financial performance of each component and will expand the range of strategic options that TIM can exploit in the interest of all stakeholders, with the possibility of attracting new partners and new financial investors,” it said.

Speaking of strategic options, TIM has clearly decided that retaining part of its erstwhile towers business is no longer a priority. It has received an offer for what seems to be most of its stake in INWIT and the board has told Labriola to go and do a deal.

More specifically, existing partner Ardian has submitted a binding offer “to purchase the majority of the share capital” of Daphne 3, the entity that holds TIM’s INWIT stake. Ardian already has a 49% stake in Daphne 3 to TIM’s 51%; Daphne 3 has a 30.2% stake in INWIT. We don’t know what Ardian has offered for the shares, just that Labriola’s remit is “to negotiate to reach an agreement.”

While TIM has shared a lot about its plans this week, we’re still not much closer to a full picture of what its future looks like. KKR is still waiting in the wings, the government is still head-scratching on its single network plan, and FiberCop is making progress…but very slowly. The industrial plan will be presented to the market at TIM’s Capital Markets Day, ahead of its half-year results, slated for late July. There will doubtless be new developments in the interim though.

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