The proposed takeover of Telecom Italia by US investment fund Kohlberg Kravis Roberts (KKR) is a tell-tale sign that some European telcos are severely undervalued.
Hence an investment fund now wants to acquire a telco that’s seen revenues decline by 20% in the last five years, amassed a net debt of over €23 billion ($26 billion), and faces intense competition in the hyper-competitive Italian market. However, in response to KRR’s bid of €10.8 billion ($12.2 billion), Vivendi, TIM’s largest single shareholder, contends that the offer undervalues TIM.
Telcos have long-term potential
Acquiring a telco for cheap, despite its lack of short-term appeal, is a strategic move that ensures an investment fund’s profits will be maximized when 5G can be monetized and the laying of fibre starts generating higher ARPU and revenues.
The proposed TIM takeover is not the first time KKR has deployed the aforementioned strategy. Earlier this year, KKR made a failed attempt to buy Dutch incumbent Royal KPN NV but was rejected as the board believed that the offer would have no material impact on KPN’s strategy. On the other hand, T-Mobile Netherlands was sold to funds managed by equity firms Apax Partners and Warburg Pincus in September of this year for €5.1 billion ($5.8 billion).
Private equity finds other ways in
Aside from trying to outright buy a telco, private equity firms have formed strategic partnerships with telcos, sometimes creating a new company through a 50:50 owned joint venture. JVs formed between European telcos and private equity have tended to focus on the broadband/fibre division as this is the area where telcos need significant financial support and is a growth area in which private equity can substantially gain.
KKR, for example, bought a 37.5% stake in TIM’s fibre company, FiberCop, for €1.8 billion ($2 billion) in 2020. More recently, Deutsche Telekom announced the creation of GlasfaserPlus GmbH, a 50:50 fibre JV with Australian investment firm IFM, and Orange Poland partnered with investment firm APG to also create a 50:50 fibre JV.
Private equity’s involvement with telcos, through buying out or forming JVs, demonstrates European telcos’ growth potential, especially with the increased rollout of their 5G and fibre networks. Some telcos cannot financially afford to do it alone, especially when they are undervalued and are in a phase of network buildout.