Italy to buy into TIM's NetCo, pushing sale ahead

The Italian government has agreed to take a stake in TIM’s networks business, potentially speeding up the process and increasing the likelihood of the sale actually going ahead.

The Ministry of Economy and Finance late last week announced that it has signed a memorandum of understanding with the telecoms incumbent that should lead to it acquiring up to 20% of NetCo.

Given that the role of the state was always likely to be a crucial element of the NetCo sale, the news is highly positive for TIM.

The ministry didn’t have a lot to say on the matter at this stage, but it’s pretty clear that it expects to have plenty to say when it comes to the future direction of NetCo. The terms of the deal it has inked with TIM “foresee the government playing a decisive role in defining strategic decisions,” the ministry said, in a perfunctory Italian language statement.

The next steps will involve the adoption of prime ministerial decree to complete the procedural process, the ministry concluded.

Italian Prime Minister Giorgia Meloni has been involved in the saga relating to the sale of TIM’s networks business since she took office late last year. She has made no secret of her desire to re-nationalise assets like TIM’s telecoms networks, something that appeared to run counter to the telco’s intention to get the best price for its assets to shore up its own finances and keep shareholders – France’s Vivendi in particular – happy. The state was always going to be able to have a say; TIM’s second largest shareholder is state-owned lender Cassa Depositi e Prestiti (CDP), while the state retains a so-called golden power that enables it to step in at TIM should it believe national security is under threat.

That being the case, when TIM selected investment group KKR as its preferred bidder for NetCo, ahead of what was presumably a less financially compelling offer – we don’t know the exact details – from a grouping made up of CDP and Australia’s Macquarie in June, there immediately arose talk of which other entities might still get involved. Rumours swirled that CDP might yet come back to the table, but ultimately it seems the government is looking for more direct involvement.

The MoU effectively means the government is backing the KKR deal, which is one less thing for TIM to worry about. But there are still plenty of hoops for it to jump through.

The deal will need EU approval under state aid rules, now that the government is involved, Il Sole 24 Ore cited Equita analysts as saying over the weekend. It will likely get the green light, the analysts predicted, since the conditions will be the same for the state as they are for KKR, but it’s still another box to be ticked.

Further, the Vivendi issue remains. The French firm was looking for a significantly higher price for the TIM network assets than reports suggested the two bidding groups were willing to pay, and a discrepancy of billions of euros, albeit in the single digits, was never going to be easy to overcome. Various Italian media outlets put KKR’s winning bid at €23 billion including €2 billion in earn-outs, while Vivendi valued the assets at €31 billion, but was apparently willing to go as low as €26 billion.

Il Sole 24 Ore now reports that Vivendi views the Ministry of Economy and Finance’s announcement as “positive news,” citing anonymous sources close to the company. However, the sources also said that the parties involved must start “a serious dialogue” with Vivendi, which suggests the issue of valuation is still in play, not to mention the firm’s reported issues over the whole concept of structural separation.

Nonetheless, the big positive here is that TIM’s MoU with the government seems to have come faster than we might have expected – there’s a first time for everything – which has to be a good sign for the conclusion of the process. TIM and KKR are working towards an end-September deadline for the emergence of a conclusive and binding offer. That date looks more feasible with the government on side.

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