March 28, 2019
MILAN (Reuters) – Italy is pushing to create a single ultrafast broadband operator by merging Telecom Italia’s copper and fiber network with smaller rival Open Fiber to avoid duplicating investments and narrow the digital divide with Europe.
But the future of Telecom Italia’s (TIM) network has become a key bone of contention between the phone group’s top shareholders, Vivendi and activist fund Elliott.
Elliott wants TIM to spin off its network and merge it with Open Fiber. Vivendi is not opposed to a merger but insists on TIM keeping control of its biggest asset.
Italian state lender Cassa Depositi e Prestiti (CDP), which co-owns Open Fiber with utility Enel, recently became TIM’s No. 2 shareholder to oversee Rome’s interest in a company seen as strategic. CDP is keen on the single network project.
The idea to spin off TIM’s network has been flirted with multiple times over the last decade and was last seriously attempted in 2013 before it was eventually abandoned.
TIM Chief Executive Luigi Gubitosi said in February all options on the network would be evaluated.
Below are some possible outcomes:
TYING THE KNOT
A merger between TIM’s network and Open Fiber would create a near-monopoly for broadband rollout in Italy, but such a move could prove difficult to implement. TIM’s network is valued at up to 15 billion euros ($17 billion), analysts say, versus a valuation for newcomer Open Fiber of more than 2 billion euros.
Each day that passes the value of the copper-part of TIM’s network loses value as more customers migrate to fiber.
TIM is saddled with more than 25 billion euros of debt and employs around 50,000 people in Italy. Stripping out TIM’s network would leave a services stub with a potentially bloated workforce and debt pile that would struggle to compete with leaner rivals.
Elliott said a network spin-off would unleash up to 7 billion euros in hidden value, attract new investors and drive a re-rating of shares — estimates some critics called optimistic.
Vivendi does not want TIM to lose control of the network because it is deemed strategic for deployment of fifth-generation (5G) mobile services. Industry regulator AGCOM last year said it was opposed to TIM keeping control of the network as it would still have “a significant competitive advantage”.
THE RAB CONUNDRUM
Italy has said it could regulate a potential single network like an energy grid offering state-guaranteed investment returns on a regulated asset base (RAB) model to tempt players on board and create Europe’s first RAB-rewarded broadband grid.
Proponents say that because of the massive costs involved in rolling out fiber across the country, operators will require a RAB-like system to guarantee investments and funding.
Critics say such a system is hard to implement since it requires a monopoly and convincing all network players to club assets. Broadband services, unlike energy, are not basic commodities, and customers may choose to opt for cheaper or alternative services, such as mobile Internet, if prices rise.
An alternative could be a merger of Open Fiber with TIM’s fiber-only assets which would be a cleaner and simpler fit. Former TIM CEO Amos Genish and Enel CEO Francesco Starace had discussed this option, sources have said.
Another option is for TIM and Open Fiber to cooperate commercially and carry out co-investments but without going to the altar. Talks in that regard have been ongoing.
One possibility is for Open Fiber to build its network in non-economically viable areas and then rent it to TIM who would channel clients on to the line. In return TIM would give Open Fiber access to its network in mainly urban areas.
($1 = 0.8909 euros)
(Reporting by Agnieszka Flak and Stephen Jewkes; Editing by Keith Weir)