Evaluating KKR’s Stake Proposal in Telecom Italia’s NetCo

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Last week, the investment firm KKR took a significant step forward in its pursuit of a stake in Telecom Italia’s (TIM) anticipated NetCo, which encompasses the company’s fixed-network. While specific financial details were not disclosed, it’s believed that KKR values the assets at roughly $23 billion.

On the other hand, Vivendi, TIM’s largest shareholder, thinks this valuation falls short by about €7 billion. This figure aligns with the belief that TIM’s assets ought to be valued nearer to €30 billion, a stance Vivendi has voiced since CEO Pietro Labriola’s initial proposal to spin off the company’s network assets. CFO of Vivendi, Francois Laroze, recently communicated this sentiment to analysts post an earnings call, saying the company aims to formally express this viewpoint, potentially during an extraordinary meeting or shareholders’ gathering.

However, there’s a noteworthy shift in KKR’s latest offer. Originally, the assumption was that TIM’s marine cable unit, Sparkle, would also be sold under the NetCo scheme. KKR’s current proposal contains a distinct offer for the undersea unit, suggesting the potential for individual asset sales. This could even prompt TIM to initiate a separate auction process for the subsea unit.

The Italian government has consistently deemed both TIM’s undersea cable assets crucial national infrastructure. Therefore, the government would likely demonstrate considerable interest in acquiring a business stake, probably through its investment bank, Cassa Depositi e Prestiti (CDP). A previous collaboration between CDP and Macquarie had seen them jointly bid for TIM’s network.

Despite any deal structure, Vivendi seems determined to challenge KKR. However, the company did indicate its willingness to “contemplate all options” concerning its holdings, suggesting a silver lining might emerge from this tense situation, albeit a faint one.

KKR’s current proposal extends to November 8, but there is a possibility it could be elongated to December 20.

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