Stage one, announced last night, brings together FlashFiber, the fibre network owned by TIM – the former Telecom Italia – and Fastweb, owned by Swisscom, and adds substantial investment by private equity company KKR.
This entity will be FiberCop, though it might not have a long existence by itself, before further mergers follow.
However, yesterday’s deal should help TIM’s aspiration to connect more than half of Italy’s properties to 1Gbps services by 2025.
The second stage, announced by TIM last week but not yet complete, will add Tiscali’s services to the FiberCop plan.
Stage three will see the creation of a single company to run a national fibre network, which will later be merged with the local fibre network.
This follows from the approval by TIM’s board of directors last night of a letter of intent to work with the equity division of state investment company Cassa Depositi e Prestiti (CDP) to create a single national network company – reaching beyond the last-mile FTTH network into a nationwide network.
This will result from a merger of FiberCop, the fibre distribution network, with Open Fiber, at the moment 50% owned by CDP.
A statement issued at the end of TIM’s Monday board meeting said: “The agreement with KKR Infrastructure and Fastweb is the first step for the creation of an Italian digital fibre network company, which represents a turning point for the country’s telecommunications.”
The board said: “The operation will allow an acceleration of the passage of customers from copper to fibre and will contribute to reducing the digital divide in Italy.”
Last night’s announcement covers FiberCop, the joint venture that will own the fibre from distribution cabinet to homes.
In what looks like becoming a complex, multi-layered deal, KKR is spending €1.8 billion on a 37.5% stake in FiberCop, the new vehicle that will take over FlashFiber, a joint venture in which TIM has an 80% and Fastweb a 20% stake.
Fastweb will own 4.5% of FiberCop and TIM will own 58%. The deal gives FiberCop an enterprise value of €7.7 billion, though an equity value of €4.7 billion.
Paolo Pescatore, owner of London-based analysis company PP Foresight, said: “A speedy resolution to the single network project was needed. This serves as a catalyst to provide a key foundation for future economic growth and productivity.”
He added: “The Italian digital infrastructure is thriving with significant investment in next generation networks such as fibre broadband and 5G. It feels like we are in a golden era of connectivity which promises to transform the way we interact and engage with devices in the future.”
No announcement has yet been made about who will be the CEO of FiberCop, though the newspaper La Repubblica has named three potential candidates: Luigi Ferraris, Carlo Filangieri and Massimo Sarmi.
Ferraris is former CEO of electricity transmission company Terna and is CFO of Poste Italiane, Italy’s post office. He is a former executive with Enel, a shareholder with CDP in Open Fiber. Filangieri is deputy COO of TIM, and Sarmi is a former CEO of Poste Italiane.
There is already a proposal – dating from June – for Macquarie Infrastructure Real Assets to buy all or part of Enel’s 50% stake in Open Fiber.
The ambitious next step is for a full merger with FiberCop and Open Fiber.
TIM said its board of directors wants to work with CDP Equity to implement the wider plan for a single national network – which it is calling AccessCo – through the merger of FiberCop and Open Fiber. It said: “Under the terms of the agreement, TIM will own at least 50.1% of AccessCo and the independence and third-party status of the company will be guaranteed by a shared governance mechanism with CDPE. Qualified majority mechanisms and prior checking rules will be applied for this purpose.”
But first FiberCop will move to what TIM calls “a further business unit”. Third-party valuers will determine the values of the assets in FiberCop and Open Fiber.
TIM said: “The due diligence process is expected by the end of the year, with the aim of reaching any merger agreement by the end of the first quarter of 2021 at the latest.”
But TIM’s attention is on the first stage, the creation of FiberCop, at the moment. It said last night: “FiberCop will allow TIM, Fastweb and other operators to co-invest, completing the fibre coverage plans in black and grey areas of the country and speeding up the adoption of ultra-broadband (UBB) services.” The term “black and grey” refers to urban and suburban districts, served by fibre to the cabinet (FTTC) and FTTH.
TIM’s memorandum of understanding with Tiscali last week will establish the terms of a strategic partnership intended to develop the ultra-broadband market through Tiscali’s economic participation in the FiberCop co-investment plan.
The deal means that FiberCop “will be immediately assigned a network asset that today already offers 85% of the population UBB speed thanks to FTTC and FTTH technology”, said TIM.
It added: “FiberCop will go on to assure FTTH coverage, with a connection speed of 1Gbps, with the aim of reaching 76% of grey and black area property units, equating to coverage of a total of 56% of the country’s technical property units, by 2025.”
In what Italy calls “white areas” – with poor or no broadband – the company “will continue the UBB deployment already in progress”, it said. “The fibre network will be developed … on the basis of the co-investment model open to all other operators, in accordance with the provisions of the European Electronic Communications Code.”
Pescatore commented: “Everyone is jumping on the bandwagon in the race to deploy fibre broadband at scale. Italy cannot afford be left behind.”
He added: “The last few months have underlined the importance of users and households alike to own better quality devices, connections and services. The arrival of gigabit connectivity paves the way for endless possibilities. With users owning a slew of connected devices, accessing a wide range of content across them, focus is turning on enabling better experiences.”
Commentary
This is the biggest step so far in creating an Italian single national fibre carrier from disparate elements. Investors and telecoms companies from outside Italy will be watching closely to see if there are lessons – in particular they will be looking at Openreach, BT’s last-mile fibre and copper subsidiary, which essentially does the same job as FiberCop.
But before that can happen, all the stages in the FiberCop deal need to be complete, which means getting Tiscali on board.
Then potential UK investors could have an idea for the valuation of Openreach, which is 100% owned by BT but is managed through an independent board.
It’s hard to judge how much Openreach is worth.
According to reports in May, Barclays Bank thinks Openreach is worth £22 billion though equities broker Redburn said the value was £14 billion.
BT denied Financial Times reports in May that it was looking to sell a stake in Openreach. But BT is increasingly beset with takeover rumours, not helped by the falling value of the group’s shares.
At today’s share price, BT’s market cap is £10.1 billion, the equivalent of €11.4 billion, and just half what Barclays thinks the whole group is worth. But BT includes wholesale, global, enterprise and retail services as well as its TV business, BT Sport. That’s doesn’t necessarily mean that they have a negative value.
One of the BT group’s big challenges is its pension commitments. The BT pension scheme had assets of £52.2 billion at the end of March 2020, though its liabilities were £1.1 billion more than that, at £53.3 billion. As with everything, the pandemic will have affected that asset valuation since then.
A big difference between the UK and Italy is that Openreach does not run a national fibre network, as Italian operators are planning to create. The addition of Open Fiber to FiberCop will create a powerful wholesale business that is unparalleled in Europe.
