By Elvira Pollina, Stefano Bernabei and Stephen Jewkes
MILAN/ROME (Reuters) – Italy’s sovereign wealth fund is manoeuvring to pull off a multibillion-euro telecoms merger and end a prolonged corporate stalemate that has held up Rome’s plans to create a national broadband network, sources say.
Cassa Depositi e Prestiti (CDP), which has 425 billion euros (379 billion pounds) in assets, is a major shareholder in two crucial building blocks of any national network, former phone monopoly Telecom Italia (TIM) and its newer rival, Open Fiber.
TIM and Open Fiber, which is owned by CDP and utility Enel, are rolling out rival fibre-optic networks across Italy, raising concerns of duplication and wasted investment at a time when Italy, a digital laggard, needs to catch up fast.
However, squabbling among TIM’s major foreign shareholders over broadband strategy has so far thwarted any merger of the two networks, prompting CDP to try and break the impasse, said the sources familiar with CDP’s thinking on the matter.
“CDP’s plan is to … call the shots on creating the single network,” one source said.
CDP, which is 82.8% state-owned and overseen by the treasury, aims to orchestrate a network merger in a way that would enable it become TIM’s biggest shareholder. That would give it the clout to push through change after months of feuding between TIM’s current top shareholder, French media group Vivendi, and No. 3 investor, U.S fund Elliott.
CDP already owns just under 10% of TIM and has put itself at “the centre of the game” in recent weeks, initiating contacts with TIM executives and Vivendi, the sources said.
That influence is yielding results. On Thursday, TIM said it had signed an agreement with CDP and Enel to start talks on ways of integrating its fibre network with its rival’s, including a possible merger.
No final solution has been found, but all options under scrutiny involve merging TIM and Open Fiber network assets in a share-based transaction that would lift CDP’s stake in TIM close to or more than Vivendi’s 23.9%, the sources said. That could give CDP a decisive vote over TIM strategy and put it in the strongest position to advance a government plan to rapidly develop a national broadband network. Enel, CDP, Vivendi and TIM all declined to comment.
Under CDP’s main option, TIM would buy the sovereign wealth fund’s 50% stake in Open Fiber, using its shares as payment, said the sources familiar with CDP’s thinking and a banker with knowledge of the matter.
Enel, also controlled by the state through a 23.6% stake held by the treasury, would sell out of Open Fiber in a separate sale to institutional investors under this scenario, they added.
“The idea is Enel cashes out and its stake offered to long-term investors. It’s not Enel’s (core) business but of course it all depends on the price,” the banker said.
At this point, however, Italian fixed-line broadband would be dominated by TIM and would likely fall foul of competition regulators, so CDP’s plan envisages a further, large infusion of private investment to dilute TIM’s position, the sources said.
The details have yet to be hammered out, but in the end the assets of both networks could be put under one roof outside TIM, perhaps under Open Fiber itself, with TIM emerging with only a minority stake in it, the sources and banker said.
They said it was too early to speculate on how much private investment would be required to achieve this outcome, but it could run into billions of euros based on network valuations.
Telecoms analysts have made widely varying valuations of the two networks, reflecting different assumptions on future growth.
They value TIM’s fixed-line assets, both optic fibre and old copper wire, at 10-15 billion euros ($11-$17 billion) and Open Fiber’s exclusively optic fibre network at 2-8 billion euros.
A unified and regulated broadband network could be an attractive proposition for private investors, offering steady and predictable returns.
Enel has right of first refusal over CDP’s stake in Open Fiber and can in theory derail CDP’s plans by exercising it. In practice, though, Enel will go along with Rome’s plan, said another source familiar with the matter.
“(Enel CEO Francesco) Starace has regular meetings with CDP but it’s clear he’s waiting for TIM first to put its house in order before making any decision,” this source said.
The government has the option anyway of replacing Starace early next year when he comes up for reappointment.
Elliott and Vivendi, locked in a year-old battle for board control at TIM, recently met to try to settle their governance differences, one person close to the matter said.
Analysts say that only a neutral network, where TIM would not have an incentive to limit competition from rival services, has the best chance of delivering the content and pricing needed to spur more Italians to go digital. In 2017, Italy had the lowest internet usage in western Europe alongside Greece, a problem that is holding back the development of a big digital economy deserving of a G7 economy with a population of around 60 million people.
“The number of people in Italy interested in fast broadband services is not that high so a lot depends on pricing. A single network could nudge prices up so the regulator’s role is important,” says Michele Polo, an expert in antitrust and regulation issues at Milan’s Bocconi university.
“The risk of TIM using its dominant position is there,” Polo said, but he added strong regulation could deal with this.
Italy’s telecoms and broadcaster incumbents have never faced the competition from cable TV that have driven connection speeds up and prices down elsewhere.
Separating fixed-line networks is seen as one of the few ways that legacy telecoms providers can create new value for shareholders. Morgan Stanley analysts described infrastructure as “the most dynamic subsector in telcos” in a note on Friday. Altice is considering a sale of its Portuguese fibre network, while Denmark’s TDC, and O2 in the Czech Republic, have already spun off their networks.
Another Bocconi expert, Carlo Alberto Cardinale Maffè of the SDA Bocconi School of Management, said if the plan was just to re-nationalise TIM and leave it with de facto control of a national broadband network, it would not work.
“I don’t think it’s in CDP’s interest. It would take TIM back 20 years and it would be a failure. Italian and European regulators would never allow that,” Maffè said.
(Additional reporting by Gianluca Semeraro in Milan and Gwenaelle Barzic in Paris; Editing by Mark Potter)