Telecom Italia has kicked off negotiations with Open Fiber about combining fiber assets to create a nationwide broadband network in Italy.
The Italian phone incumbent confirmed late Thursday it was in talks with Open Fiber's state-backed shareholders -- Cassa Depositi e Prestiti (CDP) and Enel -- about options including a possible merger.
"The objective of the discussions is to verify the feasibility of such operation, the related procedures and the perimeter of activity subject to a possible agreement, based on the will of the parties and on the legislative and regulatory frameworks," said the operator in a statement published on its website.
Telecom Italia remains Italy's biggest fixed-line operator but has been challenged in the last couple of years by Open Fiber, a state-backed company making investments in higher-speed full-fiber networks.
A tie-up could speed up the rollout of fiber networks and address government concern about Italy's broadband lag: Data shared by the FTTH Council, an industry association, shows that Italy trails most other European countries on the take-up of full-fiber services, with penetration at around 5%.
Italian authorities are understood to be in favor of a tie-up and have built up a stake of around 10% in Telecom Italia through CDP, which is now the operator's second-biggest shareholder behind French media giant Vivendi.
But the proposals have been largely responsible for a long-running shareholder battle within Telecom Italia. Elliott, an activist investor that took control of Telecom Italia's board last year, supports the government's interest in a merger of fixed-line assets, while Vivendi has been hostile to those plans.
Although some form of deal seems likely, finding a solution that keeps all parties happy will be a challenge. Earlier this year, Telecom Italia CEO Luigi Gubitosi tried to address the concern of Vivendi shareholders by arguing that Telecom Italia would be able to maintain control of a new network business formed from an Open Fiber merger, according to press reports.
Telecom Italia is under growing pressure to improve its financial position. The earnings outlook has weakened in Italy's mobile market following the arrival last year of Iliad, a low-cost challenger with headquarters in France. Telecom Italia also spent far more than analysts were expecting to acquire new 5G spectrum licenses during a government auction last year.
The company today ranks as one of Europe's most leveraged telecom incumbents. At €28.4 billion ($32.1 billion), its net debts in March were equal to about 3.2 times what it made in earnings last year.
The sale of a broadcasting business called Persidera will reduce borrowings by €160 million ($181 million), said Telecom Italia earlier this month, but make little difference to the operator's net-debt-to-earnings ratio.
Within Europe, Telecom Italia has few other ways to improve its situation. A merger of mobile assets is unlikely to be an option because regulators have historically opposed such consolidation. The recent merger of 3 Italia and Wind was made conditional on their sale of assets to another player, facilitating the market entry of Iliad.
Telecom Italia's share price was up 1.9% in Milan this morning at the time of writing.
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— Iain Morris, International Editor, Light Reading