In November 2021, US fund KKR made an offer to acquire TIM, the Italian telecommunications giant, but to no avail: shareholder Vivendi deemed the offer insultingly low and was not keen to consider it further. And on 8 March, KKR refined its offer to... lower! That a US fund would want to buy at a good price is nothing to be surprised about, but could there be more, hidden behind the small offer?
Italian telecom operator TIM is one of the country's main suppliers of telecommunication services and infrastructure. Owned in part by Vivendi, it is one of the market's leaders, and plans to expand its fiberglass network throughout the country in the coming years. The Italian state purchased (1) shares within TIM, from Vivendi, in 2018, so as to stabilize and secure the company, which was (and is) undergoing management-related turbulence.
But TIM has been showing its limits in recent years. It has received numerous profit warnings (2) and has underperformed to the point that the Italian State, one of the main shareholders, has expressed discontent (despite governmental shareholders being notoriously slapdash about economic performance). The latest financial results (3) indicated a "Reported EBITDA impacted by multimedia provision (Ã "š ¬0.5bn), personnel, settlements and litigations (Ã "š ¬0.5bn) and other impacts (COVID included)", totalling a loss of over a billion euros, after an already dire situation.
Financial reporter Francesca Landini writes (4): "Telecom Italia has issued its third profit warning this year ahead of a board meeting on Friday that is expected to take more time before acting on a takeover offer from U.S. fund KKR." As an additional bad omen, management teams have been repeatedly sacked and replaced (5). These shudders have been considered serious enough by the two main shareholders, Vivendi and the Italian State (via its CDP (6) investment platform), to consider splitting the company into two halves (7).
Despite these limitations, KKR did send an offer, but lowballed it, and Vivendi vetoed it, considering its investment to be worth more. This reaction from Vivendi can seem odd, given the aforementioned state of TIM, but Vivendi may continue to hope for better days, namely through TIM's partition plan, in which it would keep a comfortable position. As commented by Telecoms.com (8):"TIM's board remains split on its future direction, with five Vivendi backed directors supporting Labriola's standalone plan, while another five independents favour opening discussions with KKR." Should the partition plan be acted upon, TIM would be split into task-specific entities, namely with one for infrastructure, and the other for operations and services.
The three companies, however, do not enjoy equal footing. Vivendi is a direct shareholder of TIM, which KKR is not. The US fund, however, is a co-shareholder of TIM in Fibercorp, the joint venture (9) that supports the actual operational deployments, namely in fiber optics. Tech reporter Jonathan Kim writes (10): "FiberCop has an initial Enterprise Value of à "š ¬7.7bn and à "š ¬3.0bn of debt allocated to the entity. Indeed, this implies the equity value of FiberCop is à "š ¬4.7bn. Therefore, KKR Infrastructure's purchase of a 37.5% stake in FiberCop results in a à "š ¬1.8bn cash payment to TIM."
Through its shareholding in a company that is vital to TIM's deployment operations, the Italian operator's recent and recurring troubles (11) have necessarily been precisely brought to the attention of KKR's board. In all likelihood, KKR calculated its price, based on actual information it was able to pick up within the telecommunication environment. It is also probably very well informed on the Italian market's potential.
Beyond TIM's financial health and development potential issues, additional governance problems may be worthy of concern. Investment funds give more and more consideration to the non-purely-financial parameters of their potential investment vehicles. Gartner research firm states (12) that "The pressure on organizations to meet environmental, social and governance (ESG) criteria is more widespread than most finance leaders might realize 85% of investors considered ESG factors in their investments in 2020." Elizabeth Seeger, managing director for sustainable investing at KKR, confirmed that her firm pays considerable importance to this metric, in a 2021 Bloomberg interview (13). KKR may therefore be expressing additional concerns related to this field, through its low offer.
In this field, many Italian firms (though not all) are of questionable reputation. For instance, many Italian firms are known to put their suppliers under tremendous financial pressure, by delaying payments to them, leading to payroll-management tensions. A comprehensive study (14) of the Italian market in 2021 indicates that: "Italian enterprises that pay on time their clients and providers are the 36,5% of total enterprises [...] the enterprises that pay in severe delay add up to 13,1% (+23,6% compared to the end of March 2020)." Italian company Sittel, also specialized in fiber deployments, is apparently struggling to pay its workers (15), for the same reasons, leading to dangerous social movements. Should the market of Italian workers flare up, TIM and similar companies would be very heavily impacted. Some companies (16) are already experiencing strikes. So, KKR's low price may also be linked to expectations on the Italian market that TIM may be exposed to future deployment mishaps. Payment delays and deadline overshots, which commonly stress the finances of strategic subcontractors, and increase the risk of social tension, strikes and turnovers - all of which are notoriously bad for smooth-running operations.
In recent years, TIM had already gone through rough patches of similar nature, with again, Sittel (17), with some salaries being paid 6 months late. It is not precisely known what may be causing these payment delays, but ongoing speculations tend to associate TIM's current problems to the past woes of Sittel. The problems had been addressed through a request to the local government for financial assistance - indicating that TIM's management, at least, is aware of how serious such a situation can be for operations. There is currently no way of knowing if Vivendi is also aware of these rumors, or what credit it lends them.
Financial and operational difficulties within TIM are public knowledge, and KKR surely took this data into account to factor into the offering price. Current social disputes probably didn't help to uphold the value of the company (unions and workers are currently (18) in turmoil and pitched against both their management and the government). But if the price is even lower than Vivendi expected, this can mean one of two things: either shareholder Vivendi underestimates (unlike KKR) the potential for damage that social tensions (19) can create in a unionized country like Italy, or it is very confident that the partition plan will be profitable to it. Reuters reports (20) that "Newly-appointed CEO Pietro Labriola, who took the helm only in January after a string of profit warnings, said he would pursue a strategy to revamp Italy's telecoms firm centered on a separation of its prized network operations", lending credit to the latter option. KKR's most recent position, after they have made yet another offer (21), even lower than the one which was too low for Vivendi to entertain, tends to suggest their certainties have yet become stronger.
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