Telecom Italia’s fixed network selloff saga could be entering its final phase

Telecom Italia (TIM) has been on a mission in recent years to reduce debt and put its fixed and mobile services business on a firmer footing in the highly competitive Italian market.

In July 2022, CEO Pietro Labriola confirmed the management board’s intention to separate TIM’s fixed-line network infrastructure (NetCo) from the parts of the company that sell services and deal with customers (ServiceCo).

Following a number of twists and turns, and after two years of protracted negotiations, it seems that this plan could be coming closer to completion: investment firm KKR this week made a binding offer for NetCo, as well as a non-binding offer for TIM’s stake in wholesale operator Sparkle.

According to Reuters, KKR’s final bid indicated a valuation above €20 billion for TIM’s fixed access grid, including debt. Sources told the news agency that NetCo could take on about 21,500 workers, more than half of TIM’s domestic staff. The KKR offer expires on November 8, although TIM noted that it could be extended until December 20.

Notably, the plan to sell the NetCo business to KKR, which is already an investor in TIM’s fixed business, has previously been backed by the Italian government; Italy’s Treasury also intends to buy up to 20% of the network for up to €2.2 billion under an agreement with KKR.

Yet while this is a significant step forward in TIM’s plans, the coming months will prove critical. Indeed, reports suggest the deal is overly complex and is also unlikely to please TIM’s biggest investor, Vivendi. The French media group holds a 24% stake in the operator and has been consistently opposed to plans to split the fixed-line network from the group’s other assets.

The story so far

Labriola, the former CEO of TIM Brasil, was appointed CEO of TIM Group in January 2022. He succeeded Luigi Gubitosi, who stepped down from the position in late 2021 and was himself TIM’s fourth CEO in six years.

Labriola took the helm at an extremely challenging time for the Italian incumbent, which had issued two profit warnings in three months, was grappling with net debt of close to €23 billion, and had seen falling revenue for a number of years.

Indeed, Italy is now one of Europe’s most fiercely competitive telecom markets with a long-running mobile price war, sparked by the entry of Iliad Italia in 2018. TIM itself launched a low-cost mobile service under the Kena brand in 2017, in an effort to counter the Iliad effect on the market.

Meanwhile, Labriola had to contend with ongoing boardroom acrimony over a contentious plan to create a single fiber network in Italy through the merger of TIM’s assets with those of state-backed fiber operator Open Fiber – a plan that remains under consideration.

At the time, matters were further exacerbated by a bid from KKR, which indicated in late 2021 that it wanted to buy up TIM in its entirety and take it private, at a cost of €10.8 billion. TIM walked away from that deal in April 2022. 

Labriola quickly began to formulate a strategy that, TIM hoped, would provide a foundation for growth. In March 2022, he formally proposed the plan that now looks set to determine TIM’s future: hiving off the group’s Italian fixed network to separate the operator into two units. In June 2023, TIM agreed to grant a period of exclusivity to KKR following the firm’s submission of a non-binding offer. 

During TIM’s most recent earnings call in August 2023, Labriola nevertheless emphasized that any NetCo deal would be dependent on ensuring the future sustainability of the service business that will remain.

“What is important,” he said, “is the value of the network, the leverage that we reach, but also the financial and industrial sustainability of ServiceCo.”

As things stand, TIM is made up four separate entities: TIM Brasil, TIM Consumer, TIM Enterprise, and NetCo. Net financial debt at June 30, 2023 amounted to €26.2 billion, up €0.8 billion compared to the end of 2022.

More should be revealed about the operator’s future in November, when it reports its figures for the third quarter of 2023. Labriola has already expressed optimism about TIM’s performance in the first half of the year, noting that results are fully in line with its full-year targets. TIM said its domestic business stabilized in the second quarter, with revenue up for the first time in 20 quarters and EBITDA rising 0.5%.