TIM on the offensive over network separation

TIM’s remaining businesses following the probable spin-off of its network operations will be strong and sustainable, the company’s chief executive Pietro Labriola said this week.

Labriola used the Italian incumbent’s first quarter results announcement to go on the offensive about his network separation plan, which has engendered a broad range of reactions from various parties in Italy and further afield. Specifically, Labriola addressed the issue of the ServiceCo operations that do not form part of the much-discussed NetCo business and the belief – held by Italy’s trade unions and others – that they will struggle to remain viable following a spin-off.

“ServiceCo is a portfolio of three distinct businesses, well-balanced in terms of cash generation, market maturity and risk appetite,” Labriola said, a part of a presentation on TIM’s ongoing delayering plan.

He highlighted the various plus points of each business: TIM Brasil, the market leader following the acquisition of Oi’s assets and, in Labriola’s words, “a cash cow”; TIM Enterprise, which has good growth opportunities and is “a star”; and TIM Consumer, whose “operational turnaround is on track.”

It is the Consumer business that is the cause of most consternation following the spin-off. Labriola sought to allay fears by reminding his audience that it operates in a market in which all players are struggling, not just in Italy, but across Europe. “It will take time, but the direction of travel is clear,” he insisted.

TIM posted a 4.3% year-on-year increase in revenues at group level in Q1, driven entirely by Brazil; its domestic revenues fell by 0.2%, but that represented a trend improvement. Similarly, after lease EBITDA in Italy was down by 3.5% on-year, which is also an improvement on previous quarters. TIM Consumer reported a 5.1% revenue slide, but that too was better than in previous quarters, the telco said.

TIM Brasil, TIM Enterprise and TIM Consumer will account for 43%, 24% and “just 33%” of ServiceCo’s EBITDA AL respectively, Labriola pointed out. In other words, he wants the industry to look at TIM post-split as more than just its Consumer arm.

“The right way to look at ServiceCo is… to consider the combination of these three entities. If we take this approach we see that ServiceCo is already sustainable, with a combined pro forma EBITDA AL expected to be significantly above €3 billion and with… free cash flow above €1 billion in 2023,” the CEO said.

Naturally, Labriola also touched on the current state of play with regard to the NetCo sale. As it stands, TIM is waiting for improved offers for the business from either or both of KKR and the CdP Equity/Macquarie partnership that tabled non-binding bids earlier this year. To recap, TIM’s board of directors have twice asked for better offers from the bidders in an attempt to close the valuation gap between what’s on the table and the sum major shareholder Vivendi is looking for. CDP/Macquarie is reportedly at €19.3 billion, while KKR has offered €19 billion plus €2 billion in earn-outs in the event of a TIM/Open Fiber network merger, but Vivendi is after around €31 billion, although there has been talk of it going as low as €26 billion.

TIM has given the bidders until 9 June to submit new offers, and it seems this will be its last attempt to elicit more cash for NetCo. Labriola’s comments on the results call certainly seem to support that.

“We believe it’s worth taking a few more weeks to explore this final opportunity as [the] NetCo disposal remains the main option to structurally deleverage TIM,” he said.

Whether the telco’s less favourable options come into play clearly depends on the size of any new bids it receives for the business. Or as Labriola put it, “the price must be fair and at market value.”

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