KKR makes €10.8 billion takeover bid for TIM

The stage is set for the next big boardroom battle at Telecom Italia following a surprise offer to buy it.

Private equity firm KKR has launched a €0.505 per share takeover bid that values the Italian incumbent at €10.79 billion. Add in TIM’s net debt, and that valuation jumps to €32.95 billion.

TIM’s board met to discuss the offer on Sunday, and noted in a statement that KKR’s bid is intended to be a friendly takeover, requiring approval from the board and management, as well as the support of 51 percent of shareholders and the Italian government, which holds a golden share in the telco. The offer would also be subject to a four-week due diligence period. The board did not say whether  they are in favour of the bid.

If the deal were to go ahead – and that is a rather sizeable ‘if’ – then TIM’s shares would be delisted and the industry would see a major European incumbent taken into private ownership.

The rationale for KKR’s offer is fairly obvious. Two profit warnings in quick succession have led to TIM’s share price tanking over the last six months from a high of €0.46 to a low of €0.31. Controlling shareholder Vivendi has been putting pressure on CEO Luigi Gubitosi to revive its fortunes, and Reuters reported over the weekend – before the KKR news broke – that TIM’s board plans to meet on Friday to possibly oust him.

In addition to cheap shares, TIM is also one of a number of telcos that has separated out its networks business and brought in external investors, KKR being one of them; it owns 37.5 percent of FiberCop, TIM’s networks venture. If the takeover were to go ahead, it’s a fairly safe bet that KKR would look at maximising the value of those network assets, and take a similar approach to other chunks of the business, including its towers business INWIT, its IT arm Sparkle, and TIM Brasil, for instance.

However, there are several obstacles for KKR to overcome, not the least of which is Vivendi. With a stake of 23.75 percent, the French conglomerate is TIM’s biggest single shareholder and, according to sources cited by Bloomberg, is expected to oppose KKR’s offer on grounds that it undervalues the company. Vivendi spent years battling rival investor Elliott for control of the board. It ultimately lost that battle, but that hasn’t prevented it from exerting influence and weighing in on TIM’s strategy.

Then there is the Italian government, which as mentioned previously, owns a golden share in TIM giving it veto power over any bid. According to Bloomberg, the government isn’t wholly opposed to TIM going private, but it has set up a group to keep tabs on the offer, and will look closely at any plan that affects the networks business. Assuming the report is accurate, that is a pretty standard government response: history has shown they get nervous about mergers that could potentially deliver ‘strategically important’ assets like telecoms networks into foreign hands.

Rome probably wouldn’t mind seeing the back of Vivendi though. The latter holds a stake 28.8 percent stake in Italian media business Mediaset, which given its holding in TIM, has raised serious concerns about media plurality. Earlier this month, the government announced that regulator AGCOM could be given the power to conduct a six-month investigation into companies that are active in both telecoms and media.

If KKR does pull this off, this will be the third time in 15 years that TIM has changed hands. In 2007, controlling shareholder group Olimpia – which included Pirelli and Benetton – sold their stake to a consortium led by Telefónica, which in the years that followed edged out its fellow investors to become TIM’s biggest single shareholder. That title passed to Vivendi in 2014, as part of its agreement to sell its Brazilian arm GVT to Telefónica. Vivendi subsequently upped its TIM stake to 24.9 percent, just below the threshold that would require it to make an offer for the rest of the company. It later reduced its stake to the 23.75 percent it holds today.

With KKR’s offer not being flatly rejected by TIM’s board – and the government potentially keen for Vivendi to shove off – that revolving door of ownership may yet take another turn.