Telecom Italia’s Puzzle Has Too Many Pieces; Cut FVE to EUR 0.25 on Weaker Outlook; KKR Offer Fading

Telecom Italia’s current strategy has more twists than a roller coaster. KKR’s EUR 0.505 per-share offer has been on hold for many months and the private equity fund seems to be fatigued as Telecom Italia refuses to give KKR access to its books for proper due diligence. Bloomberg and Reuters have reported that the probability of an agreement is low as Telecom Italia’s management is being ambiguous about its intentions. But this is just the start of the story. On top of the KKR offer, Telecom Italia has also 1) set up a stand-alone business plan until 2024, 2) started negotiations with CDP for a network merger with Open Fiber, and 3) explored a minority sale of its enterprise division to private equity fund CVC, all of them being considered simultaneously. We are reducing our fair value estimate to EUR 0.25 per share from EUR 0.45, because in our view these announcements are diverting attention from the fact that Telecom Italia’s earnings keep deteriorating, highlighted by management’s recent profit warning in March (the fourth in 12 months--see our previous note). We also believe it is unlikely KKR would maintain its original EUR 0.505 per-share offer in the event they were given access to the books (considering the bleaker financial outlook), which also supports our fair value estimate reduction (previously EUR 0.45 per share, based on a 50% chance of the KKR offer being approved).