We are investing almost two years after activist Elliott management’s entry, at a ~40% discount to Elliott’s entry price.
Telecom Italia (TIM) had up until last year, effectively been controlled by Vivendi, who seems to have been utilizing TIM as a strategic tool for Vivendi’s media assets. With the entry of Elliott, now almost two years ago, the whole board has been changed, and a new leadership installed, a new leadership that has started to deliver results. We are entering at around 0,5 EUR per share, whereas Elliott Management entered at around 0,7-0,8 EUR per share.
Company price is not accurately reflecting TIM’s hidden fibre asset value, an asset whose strategic importance is increasing as technology develops and more data is channelled through the fibre.
Between 2013-2018, a period of five years, TIM invested ~15-20bn EUR in potentially one of the most valuable fibre assets in Europe measured by number of and density of covered households. Today, much thanks to this investment spike, Italy has an Ultra Broad Band (UBB) coverage ratio (potential subscribers reached) of ~90%, above the EU average of 82%. 80% of that coverage is owned by TIM. At the same time, Italy has one of the lowest UBB penetrations (actual subscribers) in Europe, a gap TIM is in the process of closing.But the fibre assets in Europe are also becoming increasingly valuable from a competitive and strategic point of view, as more and more data is channelled through the fibre.In Sweden alone, several interesting events are indicative of this increasing strategic value of the fibre. ComHem, a fibre focused player, merged with Tele2, a mobile focused player. Mobile and fibre are converging, as Mobile will need fibre capacity and fibre players will need Mobile connections. Pure-play companies will therefore be at a disadvantage compared to companies that own both fibre and mobile assets. Furthermore, the fibre is becoming the railroad of all media content through e.g., the wide adoption of streaming services. In several places in the world, Telco’s are therefore buying media assets, and vice versa (AT&T bought Time Warner, and Telia acquired TV4), almost creating localized monopolies on content-delivery (though often without an intelligent formulation of long-term strategy, nor price discipline). The rise of IoT will also create more data, and further increase the strategic value of fibre, not to mention its increased importance to national security. In Sweden, the former minister of enterprise and energy, Björn Rosengren, recently advocated for a separation of Skanova, the fibre assets of Telia, Sweden’s former telco monopoly.The fibre also possesses some interesting competitive characteristics. Once an area has been connected to subscribers, it becomes hard for a new entrant to motivate the capex needed to potentially steal the existing fibre player’s business. Somewhat like the sole ferry that takes you to the nearby island.
Separation of ServiceCo and InfrastructureCo could unlock significant value.
Looking at TIM as a collection of service businesses (customer acquisition, customer service, price plans, product development etc.) with high competition and low capex, and a collection of infrastructure businesses (fibre, mobile towers and data centres (TIM is the largest data centre player in Italy)) with more limited competition and high capex, one starts to see the strategic rationale for separating the two. Not to mention the difference in valuation those two types of businesses would command, especially given today’s low interest rate environment. Elliott’s stated plan is exactly this, to spin off the different infrastructure assets, and divide TIM into ServiceCo and different InfrastructureCos. TIM has already spun out its TowerCo, INWIT, which TIM still controls and is trading at ~20 EV/EBITDA.
New management delivering on plans.
After one year, cost cuts are starting to show results, strategic alliances are being created (reseller agreement with Google for cloud solutions, Vodafone for TowerCo, Netflix, Amazon and other streaming services for business development) and new third-party (low-WACC) co-investors are being lined up for the TowerCo and future FibreCo and DataCenterCo.
Value: trading below book value with almost a 100% potential EV upside to Nordic peers.
The valuation for TIM is low, no matter how you look at it. It is trading at a 27% FCF yield to market cap, and ~5,2 EV/EBITDA (2019E), with a manageable leverage level of 3,6x ND/EBITDA. This does not consider the hidden value of the fibre business which could potentially unlock value corresponding to 50-70% of market cap. TIM is also trading at 0,5 price to book value, indicating the hidden, not yet monetized, value from the fibre asset. Also noteworthy, the company is trading at a significant discount to all European peers, especially compared to the Nordic country peers, both on a EV/sales, EV/EBITDA and EV/EBIT basis, all suggesting a ~100% EV upside. We do not invest based on relative value, but this is an indication of the potential of the fibre asset as the Italian market develops. Although TIM has a larger share of (high FCF) revenues in Fixed Voice (16% of revenues), we still see value in the business, considering the hidden fibre assets in the company and its increasing strategic importance.Multiple expansion down the road could be an upside potential, if the company manages to pivot towards growth, but this would only be gravy to our case. Instead, we are seeing short term potential for visualizing/unlocking significant value through the separation of the InfrastructureCos, deleveraging and cutting cost. There are also some interesting medium-term revenue opportunities within Cloud Solutions and Datacentres.
Being and investments invests capital in public companies with active owners where we have identified under-valuation to intrinsic value and where we see potential to increase intrinsic value through active ownership. Our aim is to provide Private Equity like returns over a business cycle, but with added benefits such as liquidity, lower fees and a nimble and flexible trading strategy.
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NOTE: Historic returns are no guarantee for future returns. The value of the fund units may fall as well as rise.
