Company Reports

We are maintaining our EUR 0.25 fair value estimate after Telecom Italia reported its fourth-quarter 2023 results. Group revenue reached EUR 16.3 billion, a 3.1% year-over-year increase. Brazil was the main growth engine with a 10.7% organic increase for the full year. The Italian business grew by a meager 0.6% as the Italian mobile business continued to drag on the group with a 4% organic decline for the full year. Top-line pressure comes from a loss of market share as average revenue per user has remained stable for the past year at around EUR 11 per month. Telecom Italia’s mobile market share decreased to 24.2% in September 2023 compared with 24.9% in September 2022, according to the Italian regulator Agcom, with Iliad and mobile virtual network operators gaining share. Group EBITDA after leases grew by 6.1% organically to EUR 5.3 billion for the full year, aided by strong EBITDAaL growth in Brazil of 19%.

No-moat Telecom Italia, or TIM, provided more details on the agreement to sell its fixed network (Netco) to KKR for an enterprise value of EUR 18.8 billion. The decision was approved by the board of directors on Nov. 5. The enterprise value could rise to EUR 22 billion if a partial or total merger with Open Fiber’s network is reached. A merger with Open Fiber into a single wholesale-only network would be very positive as it would avoid network duplicities. This transaction will leave TIM as a service provider in KKR’s network and allows TIM to significantly deleverage its balance sheet, from EUR 20.6 billion in net debt today to EUR 6.4 billion. In relative terms, net debt/EBITDA will go down from 4 to 2 times, closer to the average of European telecommunication companies. The transaction is expected to close in the summer of 2024. We are maintaining our EUR 0.25 fair value estimate.

Telecom Italia, or TIM, has over 30% market share in the mobile market and 45% share in broadband in Italy. Since the entrance of Iliad in the mobile market in 2018, TIM and Vodafone have seen their top lines decline substantially, pressured by customer losses and lower pricing. Iliad has gained more than 10 million customers since its entrance by offering more-for-less plans, forcing other operators to adjust their pricing. Pressure comes on top of an already competitive Italian mobile market, with low average revenue per user. TIM has already sold all its interest in Inwit, the italian tower company born from TIM's and Vodafone Italian assets.

No-moat Telecom Italia grew revenue by 2.8% and EBITDA after leases by 5.5% in the second quarter, mainly aided by its Brazilian business, which grew sales by 9.5% and EBITDAaL by 21%. In Italy Telecom Italia reported its first quarter of domestic revenue growth in 5 years, with revenue up 0.9%. However, this was explained by the strong growth in handset sales. Italian service revenue declined by 0.9%, with the mobile market still under pressure and down 4.2% year over year. We maintain our EUR 0.25 fair value estimate and Very High Morningstar Uncertainty Rating for Telecom Italia.

Price and promotional competition continued to erode no-moat Telecom Italia’s financials in the first quarter. Italian service revenue was EUR 2.6 billion, down 2.4% year over year organically (on a 5.3% decline a year ago). This translated into EBITDA after leases of EUR 1.2 billion (3.5% organic decline and 31% margin). Group service revenue increased 2.8% organically, but this is only because management includes the acquisition of Oi Brazil assets as organic, a decision we highly disagree with. Should this be excluded, overall service revenue would have declined. We are maintaining our EUR 0.25 fair value estimate and warn investors of the very high uncertainty surrounding Telecom Italia, given its high debt burden (4.3 times net debt/EBITDA after leases), tough competitive environment, and poor capital allocation rating.

Telecom Italia’s service revenue increased by 3.6% organically in the fourth quarter, while EBITDA after leases declined by 1.3%, as the company’s cost base continues to face inflationary pressure. In 2023, management expects the Italian business will be back to growth, with stable revenue, and EBITDA growing by low single digits. We're not convinced by this guidance, given the hypercompetitive nature of the Italian market and management’s inaccuracy in meeting its own guidance, with several profit warnings over the last 18 months. We maintain our EUR 0.25 fair value estimate and remind investors of our Very High Morningstar Uncertainty Rating for Telecom Italia.

Telecom Italia shares are up 8% to EUR 0.29 at the time of the writing as KKR, the U.S.-based private equity fund, has sent a nonbinding offer to purchase TIM's Netco division. Netco contains two businesses: (1) FiberCop, which includes TIM’s fiber network across Italy and in which KKR already owns a 37.5% stake, and (2) Sparkle, which owns terrestrial and submarine cables internationally. The potential stake to be acquired has not been decided yet. The purchase would result in the loss of vertical integration for Telecom Italia. We are maintaining our EUR 0.25 fair value estimate.

Telecom Italia, or TIM, has over 30% market share in the mobile market and 45% share in broadband in Italy. Since the entrance of Iliad in the mobile market in 2018, TIM and Vodafone have seen their top lines decline substantially, pressured by customer losses and lower pricing. Iliad has gained more than 8.5 million customers in three years by offering more-for-less plans, forcing other operators to adjust their pricing. This pressure comes on top of an already competitive Italian mobile market, with low average revenue per user due to its prepaid nature.

Although Telecom Italia's results were just in line with consensus expectations, shares are up 5% at the time of the writing. Management has failed to meet its guidance several times in the past two years, so the in-line performance has probably surprised investors. We are maintaining our EUR 0.25 fair value estimate and highlight our Very High Morningstar Uncertainty Rating for the stock.

Telecom Italia improved its 2022 guidance after second-quarter results were released, but in our view this improvement just changes the outlook from “awful” to “very bad.” We remind investors that Telecom Italia released a sizable profit warning at the beginning of the year (the fourth in 12 months) as competitive conditions in Italy remain very challenging. Management now expects EBITDA after leases to decline by the low teens during the year, compared with mid- to high-teen declines previously. Fixed and mobile service revenue declined by 5% and 4.1% year over year respectively, which has resulted in a 12.3% decline in EBITDA as operating expenses only declined 1% due to inflation and other cost pressures. We are maintaining our EUR 0.25 fair value estimate and highlight our Morningstar Uncertainty Rating of Very High for the company.

Telecom Italia's first-quarter results were in line with new guidance set by management a few weeks ago, with service revenue and EBITDA down 2.5% and 16.6% respectively (guidance aims for a low-single-digit decline and a low-teens decline in 2022, respectively). High growth in the Brazilian business is compensating for a worrying performance in Italy, where service revenue and EBITDA declined by 5% and 20% respectively, with poor performance in both mobile and fixed. Our short- and medium-term forecasts remain more bearish than management guidance, as we have little confidence in their ability to set targets after four profit warnings in 12 months. We maintain our EUR 0.25 fair value estimate and highlight our very high uncertainty rating for the company.

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).

Telecom Italia, or TIM, has over 30% market share in the mobile market and 45% share in broadband in Italy. Since the entrance of Iliad in the mobile market in 2018, TIM and Vodafone have seen their top lines decline substantially, pressured by customer losses and lower pricing. Iliad has gained more than 8.5 million customers in three years by offering more-for-less plans, forcing other operators to adjust their pricing. This pressure comes on top of an already competitive Italian mobile market, with low average revenue per user due to its prepaid nature.

Telecom Italia’s, or TIM's, turbulent story is taking a new direction. KKR’s offer to acquire the company for EUR 0.505 per share has been on hold since November 2021, but it is likely it will be put aside in favor of the new 2022-24 strategic plan. The plan’s main goal is to structurally separate all of TIM’s network assets and service businesses to unlock value. Telecom Italia has already carved out its most important network assets in recent years (Inwit and FiberCop), so we believe any new structure will only result in marginal improvements. TIM’s best path would be to merge its fixed network (FiberCop) with Open Fiber as soon as possible, but uncertainty over this deal is very high as it requires political approval, and labor unions have also declared their opposition to breaking up TIM. Shares are down by more than 15% on doubts about the new strategic plan, which we share. Although we are maintaining our EUR 0.45 fair value estimate until there is a final decision on the KKR offer (expected in the next few weeks), we are planning to significantly cut our fair value estimate to account for deteriorating financials in future. Group EBITDA is expected to decline by a low-teen percentage during 2022 and we are also not optimistic about the medium-term outlook.

The rumors of a potential takeover of Telecom Italia have finally been confirmed, as private equity firm KKR yesterday made a friendly offer to acquire Telecom Italia for EUR 0.505 per share (all cash), which represents a 44% premium to the Nov. 19 closing price of EUR 0.35 and a 26% premium to our previous EUR 0.40 fair value estimate. Although in our opinion the tender offer is more than fair for Telecom Italia’s shareholders, shares haven't yet reached the offer price and are trading at about EUR 0.43 at the time of the writing, as the offer still needs approval from the board of directors and Italian government, which has a veto right as telecom assets are considered of strategic importance. We're raising our fair value estimate to EUR 0.45 per share from EUR 0.40, implying a 50% chance of approval. Some media also reported that Vivendi, Telecom Italia’s largest shareholder with almost 25% of the firm and which appoints two out of 15 directors of the board, could consider the offer as insufficient. This is, in our opinion, the higher source of uncertainty as Vivendi has been the main protagonist of corporate disagreements in the past.

Telecom Italia, or TIM, has more than 30% market share in the mobile market and 45% share in broadband in Italy. Since the entrance of Iliad in the mobile market in 2018, TIM and Vodafone have seen their top lines decline substantially, pressured by customer losses and lower pricing. Iliad has gained more than 7 million customers in three years by offering more-for-less plans, forcing other operators to adjust their pricing. This pressure comes on top of an already competitive Italian mobile market, with low average revenue per user due to its prepaid nature.

Different rumors regarding potential strategic options for Telecom Italia’s (TIM) fixed-line network have been coming from the press in recent days, mainly Bloomberg and Reuters, causing share price volatility on the stock. Shares were up by 10% during late last week and are down Nov. 8 close to 3% at the time of the writing based on new rumors. We are maintaining our EUR 0.40 fair value estimate and no-moat rating with a very high uncertainty rating.

Telecom Italia, or TIM, has more than 30% market share in the mobile market and 45% share in broadband in Italy. Since the entrance of Iliad in the mobile market in 2018, TIM and Vodafone have seen their top lines decline substantially, pressured by customer losses and lower pricing. Iliad has gained more than 7 million customers in three years by offering more-for-less plans, forcing other operators to adjust their pricing. This pressure comes on top of an already competitive Italian mobile market, with low average revenue per user due to its prepaid nature.

We're downgrading Telecom Italia to no moat rating from narrow and reducing our fair value estimate to EUR 0.40. Our moat trend is stable. We had already trimmed our fair value to EUR 0.51 from EUR 0.62 to account for very high uncertainty coming from leverage and challenging market conditions in Italy. Our further reduction to EUR 0.40 is mainly explained by the moat downgrade, as we don’t think Telecom Italia will be able to generate excess returns in future. Although shares trade at a 17% discount to our fair value we warn investors of our very high uncertainty rating, as Telecom Italia faces additional challenges to traditional ones in the telecom segment. While European telecoms usually trade at 5 to 8 times EBITDA, our EUR 0.40 fair value implies a 3.5 times EBITDA multiple for the core Italian business, a discount we believe is deserved.

Narrow-moat Telecom Italia, or TIM, updated its outlook for 2021 and now expects to finish the year in the low range of its original revenue and EBITDA (after leases) guidance. Management adjusted guidance to low-single-digit declines in revenue and mid-single-digit declines in EBITDA, as fixed and mobile revenue declined by midsingle digits. The company saw higher startup costs in football and the information and communications technology division and also higher labor expenses, which made EBITDA in Italy decline 8.3%. We maintain our EUR 0.51 fair value estimate as our 2021 forecasts were already on the low end of the originally guided range.