Projections and Assumptions

Short-term Consequences

On the short run, this has caused an immediate debt reduction for TIM by €13.8 billion, (net of adjustments and costs of €400 million), from €32 billion to pro forma level of €20 billion, alleviating its financial burden. This improves cash flow as TIM gains immediate liquidity support, given that thanks to the €0.4 billion in PNRR (National Recovery and Resilience Plan) advances related to FiberCop deconsolidated. The credit rating for TIM is also expected to improve given the signals of enhanced profitability and reduced risk for investors, meaning that raising funds would be less expensive for TIM in the future. 

Operationally, the headcount reduction from 37,065 employees to 17,281 employees (53% decrease) leads to cost reductions for TIM across personnel and operations improving short term profitability. This allows them to focus on profitability metrics, which have been seen by the 7.4% increase in adjusted EBIDTA for 2024 Q2.

KKR will benefit from acquiring a strategic asset dominating Italy’s fixed network market as the potential upsides through earn-outs limit upfront risk and consolidate KKR in the telecom industry. The predictable recurring revenue given the 15 year master Service Agreement (MSA) with TIM ensures short term cash flow predictability and minimizes operational costs 

Long-term Upsides

On the long-run, the significant financial deleveraging is expected to cause TIM’s net debt-to-EBITDA ratio to fall below 2x (from 4x in 2023). This would enable TIM to have more capital and capacity for strategic reinvestment sand save in interest payments, signaling better financial health. This enhanced financial flexibility, could result in reinvestments in growth areas like 5G networks, enterprise services, and digital transformation and compete more strategically and aggressively. Free of the infrastructure management of NetCo, TIM can now focus on customer facing services and increase its market competitiveness, particularly in its domestic market (Italy).
 

In fact, operationally, the sale will streamline TIM’s services to a narrower focus and address long standing concerns over vertical integration, allowing them to operate with fewer regulatory constraints. This would allow them to develop new retail services and streamline services with clients more quickly. 

TIM would benefit from future upsides related to NetCo’s growth given the earn-outs being tied to regulatory benefits (expected to be up to €400 million by 2025) and the consolidation events throughout the post-closing period which are expected to yield up to €2.5 billion. This can boost shareholder value, as by reducing debt, TIM would be better positioned for increased and sustained profitability in the long run. 

KKR and its Italian Partners (Ministry of Finance and F2i) are focusing on expanding NetCo’s network to ensure a fast track fiber roll out to support TIM’s capabilities indirectly. Given that TIM still has a Master Service Agreement with NetCo around its market price access to infrastructure, revenue and operational predictions can be measured more accurately.

KKR would also benefit from the significant leverage in the Italian telecom market, with a consolidated control over the fixed line broadband infrastructure and opportunity to monetize it through partnerships with TIM and other competitors. It also allows KKR to align with the increased trends in demand for broadband services, fiber optic expansion and national initiatives in Italy, such as the PNRR-funded digital transformation.

Risks and Uncertainties

The regulatory risks in EU or Italian regulatory environments can impact NetCo’s operational flexibility and could be influenced by approval delays for conditions such as Golden Power or antitrust clearance. The increased competition in the telecom industry could also impact the market share of NetCo which would cause cost overruns and delays in the fiber network expansion. With the economic uncertainty and high reliance of TIM as a key client under the Master Service Agreement, there can be operational challenges, creation of concentration risk and public or political scrutiny given its strategic nature for both corporate and institutional clients.

Sources

https://www.gruppotim.it/en/press-archive/corporate/2024/PR-Closing-NetCo-1-luglio.html
https://totaltele.com/tim-finally-completes-netco-sale-to-kkr/
https://www.mediobanca.com/en/corporate-investment-banking/news-from-the-business-divisions/advisor-to-telecom-italia-in-the-context-of-the-landmark-eur20bn-disposal-of-netco-to-kkr.html
https://www.gruppotim.it/en/press-archive/corporate/2023/PR-5-November-def.html