August 2, 2019 / 8:52 AM / 10 months ago

Not so fast: valuation issue could put brake on Italy's broadband plans

MILAN (Reuters) - Italy’s plans to create a unified broadband network are making only slow progress and risk being complicated by differences between the two state-controlled owners of Open Fiber over how much the infrastructure group is worth, sources said.

FILE PHOTO: Workers are seen installing fiber optic cables in Perugia, Italy, May 30, 2017. Picture taken May 30, 2017. REUTERS/Stephen Jewkes

Rome is pushing for the creation of a single ultrafast telecom network through a merger of Open Fiber with former monopoly Telecom Italia (TIM) to avoid duplicating investments.

But sovereign wealth fund Cassa Depositi e Prestiti (CDP) and state-controlled utility Enel are not yet on the same page over the price tag to apply to their joint Open Fiber venture.

“They’re miles apart on valuation and if they can’t agree that there’s no way they’ll find a deal with TIM,” one of the sources said.

TIM, whose biggest shareholder is France’s Vivendi, signed a non-disclosure agreement with CDP and Enel in June to start talks on ways of integrating its fibre optic network with that of Open Fiber, including a possible merger.

Talks have been going on between Enel and CDP on how to structure an eventual deal although the valuation issue had not yet been formally discussed, another source familiar with the situation said.

TIM Chief Executive Luigi Gubitosi, speaking at an earnings briefing with stock analysts on Friday, said talks were continuing in a “very constructive climate” but that deals like Open Fiber would take some time to materialize.

He added that a deal was not “an objective per se” and that TIM would not jeopardise its debt reduction plan. TIM brought its net debt down to 24.7 billion euros at end-June.

On Thursday Enel CEO Francesco Starace said he was prepared to take his time to work on a broadband deal with TIM.

In its first-half results on Thursday, TIM’s board confirmed the mandate to Chief Executive Gubitosi to negotiate with Open Fiber and its shareholders. But according to sources close to the discussions, no concrete progress has been made.

“There are lot of issues that still need to be addressed,” one of them said.


CDP and Enel, which joined forces in Open Fiber in 2016, have ploughed around 1.4 billion euros ($1.6 billion) of equity and loans into the joint venture which aims to connect 20 million households by 2023 when it also plans to break even.

According to two of the sources, Enel presented its board with a valuation of Open Fiber of 8 billion euros based on a plan to 2036. Analysts and bankers contacted by Reuters pegged Open Fiber’s valuation between 1.5 and 4.0 billion euros.

CDP, which is more than 80% owned by the Treasury, is taking a more cautious approach on price to better broker a tie up with TIM, they said.

“The problem is if you overvalue Open Fiber, CDP runs the risk of seeing its stake in TIM shoot up, forcing it to launch a takeover bid - which CDP would never consider,” one of the sources said.

CDP built a stake of just under 10% in TIM to become its second-biggest shareholder behind Vivendi in an effort to offset the French group’s influence in an asset it considers strategic.

Under Italian rules any investor that exceeds 25% of TIM must make a mandatory offer for all shares.

The future of TIM’s fibre and copper network is a bone of contention between Vivendi and activist shareholder Elliott which last year wrested control of the board with a plan, backed by CDP, that could lead to loss of control of the network.

But in May Elliott-appointed CEO Gubitosi said TIM should keep some kind of control of its fixed-line network if it is merged with Open Fiber.

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One of the sources said Vivendi wanted TIM to keep control over its network but said it was ready to accept CDP becoming the main shareholder of TIM to achieve that goal.

People familiar with the issue have previously said TIM, which also has extensive retail operations, could face regulatory issues if it takes over its smaller rival and could instead consider combining its dedicated fibre-only Flash Fiber unit.

“Even if they choose the Flash Fiber route they still need to get a deal on valuation,” one of the sources said.

Additional reporting by Stefano Bernabei in RomeEditing by Keith Weir

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