KKR Thinks It Can Fix Telecom Italia's Dysfunction

(Bloomberg Opinion) -- A jumbo deal that marries raw U.S. capitalism with European national infrastructure is hard to see happening in France, Germany or Spain — and would have been unthinkable in Italy a few years ago. But an increasing sense of urgency surrounds Telecom Italia SpA.

It’s a sign of how desperate things are that a potential 11 billion-euro ($12 billion) takeover of Italy’s national phone company led by U.S. buyout firm KKR & Co. isn’t just possible but is being welcomed by Rome.

Telecom Italia has a become a byword for dysfunctional management and unstable ownership. Before popping on Monday, the shares had fallen 25% since March, dragged lower in part by a July profit warning. That has taken the drop since November 2015 to more than 70%.

If shareholders, led by Vivendi SE, the media group controlled by billionaire Vincent Bollore, are suffering, the customers are the real victims. Italy badly lags the rest of Europe on the rollout of ultra-fast broadband. Its digitization strategy is due to benefit from support from the European Recovery Fund. The hope must be that in partnership with private equity, Telecom Italia could help the state turn fresh financial resources into something that actually benefits users.

On conventional metrics, KKR’s non-binding proposal of 50.5 euro cents per share looks tempting. It contains a premium of 46% over Friday’s closing price, or 48% above Telecom Italia’s three-month average. It’s a level not seen since Covid hit Italy in late February 2020, and compares to the average analyst price target of 43 cents last week.

But the price is not enough to win over Vivendi, Bloomberg News reported. As Bloomberg Intelligence analyst Erhan Gurses points out, the French firm’s 24% stake was acquired at an average of about 1 euro per share. Moreover, it would be wrong to see this as a purely financial investment for Bollore.

KKR already appears resigned to Vivendi snubbing its advances. It would settle for a 51% holding. Of course, Vivendi might throw in the towel if the U.S. bidder actually secured a simple majority. But Bollore could be a thorn in KKR’s side if he hangs around.

Meanwhile, Rome will want a structure that preserves sovereignty over the network infrastructure. With a golden share, it can insist. One method would be to house the network in a separate company in which state savings bank Cassa Depositi e Prestiti (currently a 10% holder) took a minority stake but with disproportionate voting power that conferred control over the subsidiary.

The government will also want guarantees on jobs. So while it’s keen to advertise that the market will have the last word on accepting any offer, the transaction that can actually get done and put before shareholders will be shaped by what Rome allows. Any government would do the same given the sensitivity of the assets.

For things to have gotten this far, KKR must see such constraints as acceptable. Maybe it reckons Telecom Italia can work as an infrastructure investment, with less ambitious return hurdles and a much longer investment horizon than a conventional buyout.

The alternatives for Italy and Telecom Italia Chief Executive Officer Luigi Gubitosi are scarce. None of the other European national telecoms firms should have any interest in putting their existing strategies at risk by doing a deal. Nationalization looks prohibitively expensive. Perhaps Vivendi could partner with a different buyout firm on a counterbid. Should KKR prevail, the risk is that governance remains characterized by competing agendas — those of a foreign financial investor, a foreign strategic investor and the state.

But if Telecom Italia obtains a competent controlling shareholder, this would be the most stability it’s had in a while. And if the government can resist meddling like its predecessors, there’s a fighting chance this could be run almost like a normal company.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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