Cox: Telecom Italia and the curse of the Euro era

ROME, November 25 (Reuters) – The acquisition of Telecom Italia by leverage (TLIT.MI) In 1999 by a mysterious auto parts magnate from Mantua was a deal that ushered in the Euro era. For the first time, bankers were able to assemble a group of venture capitalists in debt, stocks and other securities – all denominated in the single currency that was born a few months earlier – to launch a massive and unimaginably daring capital markets deal in which Roberto Colagno and his associates took over the Italian telecommunications monopoly.

By the standards of the time, that operation was successful, even if Kolanio acquired 50% of the company. In hindsight it was a slow-burning disaster. Telecom Italia’s story sounds more like a tale of failed privatization, with hints of a Russia-style hemorrhage of kleptocratic hemorrhages in which foolish investors who own small portions of capital have taken over, and gradually weakened, a critical infrastructure asset in the country.

Two decades later, there is an opportunity to correct the mistakes of the past. Ironically, Rome’s brighter future may come in the guise of the savior who was once called the barbarian at the gate. KKR private equity firm (KKR.N) This week it offered to take Telecom Italia out of the misery of the general market. Its improved chances of success represent a development in Europe’s capital markets that the original deal could never have achieved.

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The successful acquisition of Telecom Italia, better known to its customers as TIM, would widely export a more modern form of capitalism to Italy. This is an approach to corporate governance where control and authority are less important than efficiency, flexibility and results. This is in line with Prime Minister Mario Draghi’s ambitions to make Italian companies more competitive, and to lower the cost of capital for the nation.

It would not be a direct path for KKR or any buying competitor able to mobilize the more than €11 billion required to purchase TIM shares. More of a war-torn country than a modern telecommunications company, the company has been tarnished by the internecine war between competing shareholders and board members. This includes the French group of communications and media Vivendi (VIV.PA) and its president, Vincent Polloré, institutional investors such as BlackRock (BLK.N) and Vanguard, and the Italian Republic itself.

Since the government privatized Telecom Italia in 1997, the company has been the equivalent of investing in Afghanistan. The Colaninno takeover was the first major battle, but each skirmish generally injured investors and weakened the company.

Keep in mind some key numbers. To break through the fences, Collano and the company he runs, Olivetti, orchestrated a complex deal that put the enterprise value of the company at around $60 billion. KKR’s latest cash offering of 50.5 euro cents per share values ​​the entire business at approximately $37 billion, including debt. In other words, about $23 billion of wealth has disappeared.

For shareholders, the decline was sharp. Since Colaninno’s arrival, total return to shareholders, including dividends, has been negative 83%, according to Refinitiv data. That compares to a positive return of around 40% for the MSCI Europe Telecoms Services Index over the same period. The MIB 30 index, the Italian benchmark that includes TIM, has a return of 66%.

The company’s poor performance explains the difference. At Telecom Italia’s Annual Report 2000Colaninno boasts a growing business with €56 billion in revenue and €25 billion in EBITDA. by 2020, the top streak shrank to €16 billion, with just under €7 billion of EBITDA. True, the company got rid of assets, restructured its structure and made other adjustments. But it is undeniable that the narrative speaks of a massive decline of companies.

However, as with Afghanistan, there was no shortage of invaders. Colaninno lasted only a few years. While he personally enjoyed the fruits of his victory, and the sycophancy bestowed upon him in Rome, his supporters were disappointed. They eventually plotted to oust him in 2001, while he was on a fishing trip in Argentina.

The Colaninno crew sold its 23% stake in Olivetti, which in turn owns 55% of Telecom Italia, to a shell company led by Marco Tronchetti Provera, President of Pirelli. (PIRC.MI)and the Benetton family. Thus the new owners were able to make decisions without offering a takeover premium to the common shareholders. It’s a defining and unfair feature of the past two decades of conquest at Telecom Italia.

After six stressful years, Tronchetti sold the stake to Telefonica (TEF.MC) And a group of banks, having lost $4 billion in the spoils of Pirelli owners. The Spanish telecom giant couldn’t have done better. With Rome resisting foreign control, and Telecom Italia’s operations deteriorating, Telefonica in 2015 sold a large part of its stake to Vivendi as a partial payment to a Brazilian company.

Thus began the creeping possession of Bolloré, which built 24% of the stock. The fate of the latest acquisition attempt will depend in part on the French businessman. Vivendi is resisting KKR’s offer, which is not surprising given that it paid more than €1 per share for its stake. Offering anywhere near that price would be reckless for KKR, given how little wiggle room it has to increase Telecom Italia’s debt. Read more

Getting a fair price for all shareholders – a feat not achieved in two decades – will require Telecom Italia’s board of directors to do the right thing when it meets on Friday. This means penalizing investment banking advisors for starting a process by which managers can properly evaluate strategic alternatives.

If this results in a bid being open to all shareholders, Bolloré will not be able to prevent KKR or another bidder from obtaining a majority. It is definitely better to join the consortium, participate in the dismantling and clean-up of the business, and share in the benefits without paying the fees that KKR charges to its limited partners. Over time, Vivendi may find a way to trade its stock for some useful content assets.

For Draghi, the message that Telecom Italia’s top sale will send is immeasurable. While the prime minister must always balance domestic political sentiments about outside investors stumbling on domestic assets, a more regulated market for corporate control would help Italian entrepreneurs, corporations and ordinary borrowers attract more capital at lower cost.

Then again, Telecom Italia’s past performance could be an indicator of future failure. From one enthusiastic investor to another, the company was a sure way to lose money. And even the KKR isn’t immune to weird slip. As one KKR supporter boasted, this would be the largest leveraged purchase since TXU, the Texas facility that went private in 2007. It later became one of the largest bankruptcies in US history. KKR wrote off its $4 billion investment. Telecom Italia’s curse has yet to be lifted.

Reuters Graphics Reuters

Continued @rob1cox on Twitter

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Editing by Peter Tal Larsen and Oliver Taslik. Drawing by Vincent Flasser.

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