TIM to finally start takeover talks with KKR

TIM has instructed its chairman and chief exec to begin formal talks with KKR on the proposed takeover deal, but this story is a long way from its conclusion still.

The Italian incumbent is still covering all bases. In an announcement that came late on Sunday, it made it clear that it is still pushing on with its recently-announced strategic plan, a key tenet of which is the legal separation of TIM into a services operation and a networks business, as well as exploring a possible merger with Italy’s other main fibre network operator, Open Fiber.

TIM has shied away from formal announcements on the Open Fiber situation of late. It’s strategic plan did not mention the operator at all, for example, although the assumption was that it intended to merge the business into its new networks arm, should all parties manage to reach agreement. TIM has now confirmed that it is “continuing negotiations” with state-owned lender Cassa Depositi e Prestiti (CDP), which holds 60% of Open Fiber – as well as a 10% stake in TIM, of course – and is in talks with the relevant government authorities too.

While the return of Open Fiber to TIM’s communications is noteworthy, clearly the main element of TIM’s announcement is the opening of discussions with KKR.

The private equity firm tabled a €10.8 billion takeover bid for TIM in November, and the subsequent months brought endless speculation on the likelihood of a deal going ahead. But TIM itself had surprisingly little to say on the matter.

Its strategic plan and the commentary surrounding it strongly suggested that TIM was preparing for a future under its current shareholder structure. Indeed, chief executive Pietro Labriola – who ended up in the job following the resignation of his predecessor Luigi Gubitosi in the wake of the KKR bid, incidentally – was quoted as saying that his plan was broadly similar to KKR’s, but would see the value generated go to existing shareholders. He also noted that he believed the KKR offer undervalued TIM, but that’s probably to be expected.

But it’s not all about what the CEO wants. The TIM board is known to be divided on the KKR option, with Vivendi-backed directors supporting the go it alone option, while others are keen to buddy up with the PE outfit, to oversimplify a little.

Both options are essentially geared towards extracting the most possible value out of TIM’s assets, albeit with different beneficiaries. KKR is seeking to capitalise on TIM’s depressed share price, and last week there were even reports that while it is still interested in the telco, it is looking to shave around €2 billion off the purchase price, which gave the markets a ray of hope, but doubtless did not find favour with everyone at TIM.

We don’t know what KKR’s plans would be, should it succeed in getting its hands on TIM; clearly the network spin-off plan and KKR ownership are not mutually exclusive. Furthermore, KKR has some leverage over TIM on that score. It owns a 37.5% stake in FiberCop, TIM’s fibre-to-the-home (FTTH) business, and has reportedly said it would oppose any move to merge that entity into a new networks operation…unless it were calling the shots at TIM, presumably.

There are myriad complexities here, from the strategic and operational direction of the company, to the divided boardroom, various political interests and so forth.

TIM’s decision to open talks with KKR helps to push things forward, but don’t expect a quick resolution.