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Tangled: TIM’s Netco troubles signal carveout conundrum

Telecom Italia's (TIM) [BIT:TIT] struggle to strike a deal with a consortium led by KKR [NYSE:KKR] for its fixed-line division is the latest in a saga of attempts to monetise carved-out infrastructure assets.

Much of the Italian’s incumbent plan has focussed on splitting its business into two separate companies – dividing its network assets (NetCo) and services operations (ServCo) – with the latter loading up much of the company’s debt pile. An offer of EUR 23bn from a KKR-led consortium is now on the line.

Executing the deal has turned into something of a nightmare. French media group Vivendi [EPA:VIV], TIM’s largest shareholder, is opposing the current deal, instead putting a EUR 30bn price tag for the infrastructure division as it looks to avoid making a loss on the EUR 4bn that its spent on its stake.

The deal has also raised issues of protecting Italy’s strategic interests and need to safeguard jobs, prompting the Italian Ministry of Economy and Finance (MEF) to take a direct stake in the business as part of the deal.

If TIM and KKR find a way to escape the nightmare, the deal would spark life into what has been a subdued six months for telecom asset sales. Italy has been the region that has shown signs of life in infrastructure asset carveouts, with the sale of  Wind Tre’s mobile and fixed network infrastructure assets to EQT Infrastructure in a EUR 2bn deal making up most of the activity.

In the year to date, around EUR 4.8bn worth of telecom asset acquisition M&A in Europe, the Middle East and Africa (EMEA) have been completed across 19 deals, a far cry from the EUR 21bn spent across 21 deals in the same period the year before, Mergermarket data shows.

Divide and conquer

To structurally divide infrastructure operations is one task but to execute a deal for prize infrastructure assets is another, no matter the level of appetite from investors. Lumen’s [NYSE:LUMN] carveout and sale of its European infrastructure operations to Colt Group for EUR 1.8bn is among the few operators to dial up a successful deal.

FTSE 100 UK-telecom incumbent BT [LON:BT.A] separated infrastructure arm Openreach, which has historically been a prospective target and said to have attracted buyout interest from private equity and infrastructure funds. The stake build by Patrick Drahi, the founder of French telco giant Altice, who is said to be considering increasing his stake to 29.9%, has raised the prospect that the French billionaire might push for a full carve-out of the unit.

But, as with TIM, any prospects of a deal for the infrastructure giants faces headaches. While UK Secretary of State for Business, Energy and Industrial Strategy Kemi Badenoch opted against a national security review into the stake build, any attempt of an overseas owner to own Openreach could flag national security concerns.

Towers Triumph

While carveout execution remains challenging, a segment of telecom activity that has seen less opposition is the separate and eventual sale of tower assets, which has shown relative buoyancy. Vodafone’s [LSE:VOD] sale of its stake in its tower business Vantage Towers [ETR:VTWR] to GIP and KKR [NYSE:KKR] for EUR 16bn encapsulated the largest tower deal to date.

Next up is expected to be a sale by Orange [EPA:ORA], which has appointed Bank of America to help explore options for its tower business TOTEM; while Telenor [OSL:TEL] is undergoing preparations to carve out and eventually monetize its tower portfolio for next year. Cornerstone, the tower business owned by Telefonica [BME:TEF], Liberty Global [NASDAQ:LBTYA] is also currently running a process to sell a non-controlling stake in the business. 

For TIM, whether a deal can be struck remains to be seen. But with appetite rife for towers and infrastructure units alike, carveout talks are here to stay. 

Analytics by Santosh Shetty

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