The fragmentation of Telecom Italia opens more lines of mergers and purchases

Telecom Italia appears to be finally moving towards fragmentation. Selling its prized landline network, valued at at least €20bn, would solve most of its persistent €5bn debt problem. For shareholders, the hope is that the remaining service company will also come into play.

In the first months of the new boss Pietro Labriola in the position there has been everything. After rejecting a €10.8bn takeover bid from KKR in April, it is attempting a venture capital-style breakout of its own, albeit at a slower pace and under constant scrutiny from public markets.

The sale of the network, in all likelihood to the state investor Cassa Depositi e Prestiti, makes perfect sense. A conservative valuation of €20bn would reduce the company’s net debt from €23bn to just €5bn, assuming the network takes on €11bn of debt and after accounting for minority stakes. This is equivalent to about 2 times the gross operating profit (Ebidta) forecast for 2025, after lease payments. A higher valuation would allow Telecom Italia to invest in the remaining business, or even return money to its long-suffering investors.

There could be more. The remaining service company could be a target. Purchasing company CVC has already expressed interest in acquiring a minority stake in the fastest growing division serving corporate clients. Telecom Italia said yesterday that it was looking to sell a part of that business.

Larger deals should not be ruled out. Despite European antitrust hurdles, Italian phone operators are betting on consolidation as an antidote to fierce competition. There are many catches. The sale of the network would take months. And the EC could oppose further consolidation within the country. For shareholders, however, the breakup plans open up some interesting lines of mergers and acquisitions.