In the past weeks, a fierce boardroom battle unfolded at Telecom Italia (TIM), as the activist hedge funds Bluebell Capital Partners and Merlyn Advisors proposed two different slates of candidates for the election of the new board of the Italian telecom giant. The decision of Vivendi to abstain from the vote was crucial for the election of the list proposed by the exiting board and the re-appointment of Labriola as CEO.
An insight into the acquisition of Netco By KKR
TIM, formerly known as Telecom Italia, is an Italian telecommunications company that provides fixed telephony and DSL data services (Wi-fi connection). It is the largest Italian telecommunications service provider in revenues and subscribers, and it was founded in 1994 by the merger of several state-owned telecommunication companies such as SIP, the former state monopoly telephone operator in Italy.
In February 2023, TIM announced that it has received an offer of €23bn from the private equity firm KKR for the fixed landline network named Netco, an asset of strategic relevance for TIM. KKR is a leading global private equity firm with over $500bn AUM, holding investment in multiple asset classes and whose relationship with TIM over the last years has been quite complicated. More specifically, in 2021, KKR’s first takeover offer equivalent to €33bn was previously rejected by Vivendi, and the actual offer of €23bn led to many conflicts with shareholders including Vivendi.
Diving deep into the recent acquisition of €23bn, the fixed network asset “Netco” has been acquired from KKR at an EV/EBITDA multiple of 10x relative to 2021 EBITDA. The rationale for TIM behind this acquisition is to take advantage of the capital raise and expertise from KKR to then decrease the high amounts of debt, reduce increased domestic competition, increase margins, and avoid further management overhauls. More specifically, at the announcement of the deal, TIM had €25.5bn of net debt and net debt was 4.4 times EBITDA in 2022, while the Spanish peer Telefonica traded at 2.5x Net debt/EBITDA. Furthermore, as evident in the graph below, the company is so leveraged that in 2023 Total Debt/Equity reached the value of 2.35, while also demonstrating a constant increasing trend in its indebtedness from 2020 onwards.
TIM, formerly known as Telecom Italia, is an Italian telecommunications company that provides fixed telephony and DSL data services (Wi-fi connection). It is the largest Italian telecommunications service provider in revenues and subscribers, and it was founded in 1994 by the merger of several state-owned telecommunication companies such as SIP, the former state monopoly telephone operator in Italy.
In February 2023, TIM announced that it has received an offer of €23bn from the private equity firm KKR for the fixed landline network named Netco, an asset of strategic relevance for TIM. KKR is a leading global private equity firm with over $500bn AUM, holding investment in multiple asset classes and whose relationship with TIM over the last years has been quite complicated. More specifically, in 2021, KKR’s first takeover offer equivalent to €33bn was previously rejected by Vivendi, and the actual offer of €23bn led to many conflicts with shareholders including Vivendi.
Diving deep into the recent acquisition of €23bn, the fixed network asset “Netco” has been acquired from KKR at an EV/EBITDA multiple of 10x relative to 2021 EBITDA. The rationale for TIM behind this acquisition is to take advantage of the capital raise and expertise from KKR to then decrease the high amounts of debt, reduce increased domestic competition, increase margins, and avoid further management overhauls. More specifically, at the announcement of the deal, TIM had €25.5bn of net debt and net debt was 4.4 times EBITDA in 2022, while the Spanish peer Telefonica traded at 2.5x Net debt/EBITDA. Furthermore, as evident in the graph below, the company is so leveraged that in 2023 Total Debt/Equity reached the value of 2.35, while also demonstrating a constant increasing trend in its indebtedness from 2020 onwards.
However, through the deal, TIM’s debt is expected to decrease by around €14bn, thus potentially satisfying the initial requirements of decreasing its leverage. On the other hand, KKR managed to acquire an indebted undervalued company and unlock potential value in a market such as the telecommunications one, with growing demand and steady cash flows.
Shareholder and Market Reaction
The lack of shareholder vote on the disposal led to various oppositions by shareholders, especially by Vivendi, the major shareholder, who believes that the offer undervalues the network, and that any sale would be a strategic mistake. More specifically, Vivendi who owns a stake of around 24% of TIM’s outstanding shares, and 17% of the voting rights, believes that the valuation of the network should be closer to €30bn and that the sale requires an extraordinary shareholder vote as it fundamentally changes TIM’s corporate structure. Consequently, Vivendi has threatened TIM to pursue legal action and protect its interests in this involuntary deal.
Furthermore, as a shareholder meeting to elect a new board approach, further opposition between two main shareholders, Merlyn and Bluebell, rises. Broadly speaking, as it will be further discussed later, Merlyn does not contest the KKR deal but wants to sell also other assets such as TIM Brazil and TIM Consumer, while Bluebell appears to be aligned with Vivendi’s position.
On the day of the announcement (February 2nd, 2023), it can be seen that the stock price initially increased by 20% while the Italian stock Index kept trading at a stable level, and then after a period of variation between ups and downs, TIM’s share price suddenly fell in March while the MIB index continued to increase. The 20% fall in the stock price from the deal announcement date occurred because of the harsh shareholder disagreements and the controversial business model presented by Labriola, TIM’s CEO. Overall, around 20% of TIM’s outstanding shares were shorted over this period.
A primer on the Italian “Voto di Lista”
Italy’s voting system (“Voto di Lista”), also known as “slate voting”, is a clause implemented in 1994 and contained in the company bylaws that allows minority shareholders to be represented on the Board of Directors: it is therefore a method of protecting minorities.
The members of the Board of Directors for listed companies must be "elected on the basis of lists of candidates" (TUF, art. 147-ter) and at least one of the members should be expressed by the minority slate that has obtained the most votes.
The legislator of the TUF has given to the statutory autonomy the determination of the minimum share of participation necessary for the presentation of the lists. TIM Group’s bylaws stipulate that only members who alone, or together with other members, hold shares representing at least 0.5% of the voting share capital in the ordinary Shareholders' Meeting are entitled to submit slates. TIM’s Board of Directors consists of no less than seven and no more than nineteen members.
The proposal for deliberation must be formulated before the meeting, through blocked lists (i.e., unchangeable). The vote can be expressed only by voting for one predefined list and each candidate can present himself in a single slate under penalty of ineligibility. This voting method allows to structure the decision to appoint directors as a single resolution (simultaneous appointment of "all" directors), ensuring one or more seats to candidates drawn from minority slates.
The President of the Assembly, after the ballot, applies to the number obtained the 'electoral rule' statutorily provided and divides the seats to be filled among the lists that received the votes. It is up to the President of the Assembly to determine which lists are ‘minority’. The TIM Group’s company bylaws state that two-thirds of the directors to be elected are drawn from the list that obtained the majority of votes (Majority List), in the progressive order in which they are listed in the slate itself. The remaining directors are drawn from the other lists, through a quotient mechanism for which those who have obtained the highest quotients are elected.
The slate voting thus ensures the participation of minorities in the formulation of lists and proportional representation on the Board of Directors, achieving greater protection of the interests of minority shareholders, allowing them to actively participate in business decision- making and to express their opinions and preferences.
A major drawback of slate voting is the potential abuse by minorities: minority administrators may pursue particular interests rather than social interests. To mitigate the problem, The TIM Group’s company bylaws stipulate that all lists must ensure the presence of candidates who meet the requirements of independence provided by the law and/or the Corporate Governance Code of listed companies. It would seem appropriate that any dialectic within the Board of Directors should be entrusted to independent directors by virtue of their theoretical detachment from any particular interest.
The "voto di lista" could also introduce elements of excessive conflict that may affect the efficiency of the administrative body, whose task is the pursuit of social interest. It is therefore important to avoid the typical logic of the Assembly, in which divergent interests prevail.
Bluebell Capital Partners and Merlyn Advisors
Bluebell Capital Partners is an activist investment firm based in London, focusing on large- cap European public equities. It was founded by the two former investment bankers Giuseppe Bivona and Marco Taricco. In 2014, the two bankers founded their own investment advisory business, Bluebell Partners, and, later in 2019, they launched Bluebell Capital Partners. Bluebell manages a focused portfolio, generally holding between 10 and 15 positions, with a medium-term investment horizon (18-24 months). Currently, the activist investor hold 0.5003% of TIM.
Merlyn Advisors also is an activist investment management firm founded in London in 2018 by Maarten Philippe Petermann, Maren Schirmer, and Alessandro Barnaba. The fund focuses on special situations. In particular, Barnaba is a former banker from JP Morgan who has a deep connection with the business and financial landscapes in Rome.
The fund currently holds 0.53% of TIM.
Merlyn and Bluebell proposed two different slates of candidates for the shareholder meeting of April 23rd aimed at electing the new board of the Italian telecom group.
The different slates also envisage the different visions that the two investors have about the future of the business.
Merlyn seemed to not contest the KKR deal but considers the possibility of a deep turnaround by selling the domestic consumer business, TIM Consumer, and the Brazilian phone carrier TIM SA. The rationale for this proposal arises from the fact that Merlyn believes TIM Brazil to be a non-core operation while TIM Consumer lacks competitive advantage.
Given the turnaround plan, Merlyn’s slate of candidates conveyed a more strategic and long- term view, focusing on driving sustainable growth and innovation within TIM. As a matter of facts, Merlyn’s slate included ten candidates, with Stefano Siragusa, a former TIM deputy general manager, nominated for the CEO role, and Umberto Paolucci, a former Microsoft executive, proposed for the chairmanship.
Overall, all the candidates are characterized by strong backgrounds in technology, innovation, and long-term strategic planning. Their proposed board excluded Labriola and focused on candidates with experience in network infrastructure and asset sales. This suggested that Merlyn might have pushed for a new CEO and a strategic shift for TIM.
On the other hand, Bluebell appeared to be aligned with Vivendi’s position that the KKR deal must not be concluded. Moreover, Bluebell, with its activist approach to investment, saw TIM as the perfect target for restructuring and cost-cutting measures. Regarding the list of candidates, the activist fund’s proposal was composed of experts in finance, restructuring, and corporate governance. The ultimate goal was to disrupt TIM's management and operations to opt for short-term financial gains. Bluebell's slate included Paola Giannotti De Ponti, a former
TIM executive, as chair, but did not propose a candidate for CEO, suggesting that they may be open to retaining Pietro Labriola, the current CEO.
Bluebell Capital Partners is an activist investment firm based in London, focusing on large- cap European public equities. It was founded by the two former investment bankers Giuseppe Bivona and Marco Taricco. In 2014, the two bankers founded their own investment advisory business, Bluebell Partners, and, later in 2019, they launched Bluebell Capital Partners. Bluebell manages a focused portfolio, generally holding between 10 and 15 positions, with a medium-term investment horizon (18-24 months). Currently, the activist investor hold 0.5003% of TIM.
Merlyn Advisors also is an activist investment management firm founded in London in 2018 by Maarten Philippe Petermann, Maren Schirmer, and Alessandro Barnaba. The fund focuses on special situations. In particular, Barnaba is a former banker from JP Morgan who has a deep connection with the business and financial landscapes in Rome.
The fund currently holds 0.53% of TIM.
Merlyn and Bluebell proposed two different slates of candidates for the shareholder meeting of April 23rd aimed at electing the new board of the Italian telecom group.
The different slates also envisage the different visions that the two investors have about the future of the business.
Merlyn seemed to not contest the KKR deal but considers the possibility of a deep turnaround by selling the domestic consumer business, TIM Consumer, and the Brazilian phone carrier TIM SA. The rationale for this proposal arises from the fact that Merlyn believes TIM Brazil to be a non-core operation while TIM Consumer lacks competitive advantage.
Given the turnaround plan, Merlyn’s slate of candidates conveyed a more strategic and long- term view, focusing on driving sustainable growth and innovation within TIM. As a matter of facts, Merlyn’s slate included ten candidates, with Stefano Siragusa, a former TIM deputy general manager, nominated for the CEO role, and Umberto Paolucci, a former Microsoft executive, proposed for the chairmanship.
Overall, all the candidates are characterized by strong backgrounds in technology, innovation, and long-term strategic planning. Their proposed board excluded Labriola and focused on candidates with experience in network infrastructure and asset sales. This suggested that Merlyn might have pushed for a new CEO and a strategic shift for TIM.
On the other hand, Bluebell appeared to be aligned with Vivendi’s position that the KKR deal must not be concluded. Moreover, Bluebell, with its activist approach to investment, saw TIM as the perfect target for restructuring and cost-cutting measures. Regarding the list of candidates, the activist fund’s proposal was composed of experts in finance, restructuring, and corporate governance. The ultimate goal was to disrupt TIM's management and operations to opt for short-term financial gains. Bluebell's slate included Paola Giannotti De Ponti, a former
TIM executive, as chair, but did not propose a candidate for CEO, suggesting that they may be open to retaining Pietro Labriola, the current CEO.
April 23rd and the Decision on the new TIM Board
Vivendi, TIM’s largest shareholder with a 23.75% stake in TIM, decided to abstain during the vote of April 23rd, claiming that it did not support the slate put forward by the outgoing Board, given its continuity with a Board during whose tenure the stock price lost half of its value and which is responsible for approving the sale of TIM’s fixed network in November 2023 at a price that did not reflect the intrinsic value of this asset, without involving the shareholders’ meeting and the related parties’ committee and without providing, to this date, complete and reliable information to the market on the transaction and its effect on TIM’s sustainability.
The French media company also stated that it will be pursuing legal actions in front of the Court of Milan against the transaction with KKR.
Given its abstention, Vivendi paved the way for the victory of the list presented by the previous board, therefore reconfirming Labriola as CEO with the support of the shareholder Cassa Depositi e Prestiti (CDP), which holds 9.81% of TIM.
Bluebell and Merlyn were disappointed by such action, as they were counting on Vivendi support to get control of TIM’s board.
Despite the fall of more than 24% from the beginning of the year, the stock market reacted slightly positively both on April 23rd and 24th, with an increase of 1.8% in the two trading days after the board election.
Overall, the Board decision and the decision of Vivendi to abstain from the vote reflect the wish of the major shareholders to hold accountable the current management for the extremely poor stock performance of TIM, highlighting that it is incumbent on the ongoing management and its supporters to sort out the troubled situation in which the group finds itself.
Vivendi, TIM’s largest shareholder with a 23.75% stake in TIM, decided to abstain during the vote of April 23rd, claiming that it did not support the slate put forward by the outgoing Board, given its continuity with a Board during whose tenure the stock price lost half of its value and which is responsible for approving the sale of TIM’s fixed network in November 2023 at a price that did not reflect the intrinsic value of this asset, without involving the shareholders’ meeting and the related parties’ committee and without providing, to this date, complete and reliable information to the market on the transaction and its effect on TIM’s sustainability.
The French media company also stated that it will be pursuing legal actions in front of the Court of Milan against the transaction with KKR.
Given its abstention, Vivendi paved the way for the victory of the list presented by the previous board, therefore reconfirming Labriola as CEO with the support of the shareholder Cassa Depositi e Prestiti (CDP), which holds 9.81% of TIM.
Bluebell and Merlyn were disappointed by such action, as they were counting on Vivendi support to get control of TIM’s board.
Despite the fall of more than 24% from the beginning of the year, the stock market reacted slightly positively both on April 23rd and 24th, with an increase of 1.8% in the two trading days after the board election.
Overall, the Board decision and the decision of Vivendi to abstain from the vote reflect the wish of the major shareholders to hold accountable the current management for the extremely poor stock performance of TIM, highlighting that it is incumbent on the ongoing management and its supporters to sort out the troubled situation in which the group finds itself.
By Alessandro Cera, Matilde Chiavenato, and Chiara Roncoroni
Sources:
- Bluebell Capital Partners
- Consob
- Corcom
- Diligent
- Hedge Week
- MarketScreener
- Reuters
- Sole 24 Ore
- Start Magazine
- TIM
- Value Walk
- Vivendi
- Yahoo Finance