The merger of its broadband network with Open Fiber will require the approval of shareholders, bondholders and regulators
KKR could have a consolation prize after its failed purchase of Telecom Italia. This took a formal step on Sunday towards the merger of its broadband network – which has the fund as an investor – with Open Fiber, controlled by the State.
KKR had hoped to delist the debt-laden operator before engineering the separation of its fixed-line network and arranging a possible marriage to Open Fiber. But opposition from TIM shareholders forced KKR to back out of its $10.8 billion purchase in April.
The network merger is a second chance to unlock value for KKR, which owns 37.5% of the TIM unit that operates its last-mile broadband connections. A deal with Open Fiber would eliminate wholesale competition and unnecessary duplication of investment in road digging and cable laying.
But first they must agree on a price. It is not easy: Macquarie bought 40% of Open Fiber in 2021 at a valuation of more than 7,000 million, including debt, despite the fact that it generated an EBITDA of less than 100 million in 2020. The TIM network, which generates some 2,000 million of annual ebitda, it may be worth 19,000 million including debt, according to analysts.
Ownership is also an issue. The state fund CDP, which owns 60% of Open Fiber, wants to control the combined entity. The Italian competition regulator will also not approve the merger if TIM remains in charge. That implies any deal will require a transfer of cash from taxpayers to the private sector incumbent.
An alternative would be for TIM to reduce its stake by transferring a large part of its 23 billion net debt to the merged firm. But bondholders, who rely on network cash flow to sustain debt, may be reluctant to give up control.
Finally, regulators are likely to impose additional requirements before allowing a de facto monopoly in broadband to be created. TIM’s stock, languishing below 30 cents, reflects the fact that the deal will have to overcome several hurdles.
