Why Telecom Italia’s Attempt to Acquire Apple Ended in Trouble

Telecom Italia SpA, the troubled former telephone monopoly of Italy, had once proposed a plan to acquire Apple Inc.

About 25 years ago, a group of airline executives flew to California to meet with Apple founder Steve Jobs with a bold plan to buy the tech company at a time when it was struggling to keep up with rivals like International Business Machines Corp.

Telecom Italia, on the other hand, was flying high and was the sixth largest telephone company in the world based on sales. It was valued at around 90 billion euros ($100 billion), had minimal debt, had stakes in dozens of technology groups around the world and employed more than 120,000 people.

While Apple’s rise from the ashes has been well documented, the fate of its potential buyer is less well known outside of Italy. Today, the operator is saddled with more than €30 billion in gross debt, controls just one company outside its home market — Brazil’s No. 3 phone operator — and employs only a third as many as its executives did. liked Jobs.

Most tellingly, Telecom Italia is now in the position of having to sell its landline network just to get its debt pile under control. The deal would be a modification agreement and, if successful, the first such sale to a European airline.

In a small twist of fate, the likely buyer is a US company, although not a tech giant like Apple, but the private equity firm KKR & Co. With the progress of the sale of the network, Telecom Italy is now a truly valuable asset. feels as good as ever to ask what happened to this once promising company?

From Cupertino to Colaninno

Rewind to 1998. Former Apple executive Marco Landi set up a meeting with his new employer, Telecom Italia, according to his 2018 biography. Chairman Gian Mario Rossignolo then quickly dispatched a team to meet with Jobs at Apple’s headquarters in Cupertino. The proposal was originally conceived by Francesco De Leo, then CEO of Telecom Italia.

The group prepared “a detailed offer to buy Apple,” Rossignolo recalled in an interview, noting that the world’s most valuable company was worth just $5 billion at the time. But Jobs rebuffed the Italians, claiming he already had a deal with someone else.

In many ways, a trip to California would be a top mark for a phone operator. Just a year later, a group of Italian entrepreneurs led by Roberto Colaninno, current CEO of Vespa maker Piaggio & C SpA, bought the company in Europe’s biggest-ever hostile takeover. Investors paid about 100,000 billion lira (50 billion euros) for the company, at least half of which was financed with debt.

This left Telecom Italia sidelined as European rivals embarked on an intensive round of industry consolidation. In the intervening years, sales and profit have fallen, both of which almost halved in the last decade, as the company’s debt continued to grow.

Cutthroat Market

Telecom Italy’s turnover last year was only about 16 billion euros, while in 2012 it was about 26 billion euros. At the same time, adjusted earnings before interest, taxes and depreciation fell to 5.9 billion euros from almost 11 billion euros in 10 years. earlier.

A spokesperson for Telecom Italia declined to comment for this article.

As a former monopoly operator, Telecom Italia has always been plagued by a complex mix of high labor costs and ever-increasing investments to keep its network infrastructure up to date.

The company also pays a heavy price for frequency licenses, about one billion euros more than a decade ago for 4G frequencies and about 2.5 billion euros for 5G frequencies in 2018 alone.

Still, none of this fully explains Telecom Italia’s steep decline. The real roots of the company’s problems lie in Italy’s domestic telecommunications environment.

The country is one of the world’s most competitive telecommunications markets. Monthly fees for full-fiber landline services, which usually include unlimited Internet, can cost as little as $20 to $25, about a quarter of what most U.S. consumers pay.

And competition has intensified in recent years with the arrival of new players – notably France’s Iliad SA, which entered the Italian mobile market in 2018 and positioned itself as a flashy, no-nonsense specialist, igniting an all-out price war.

This has left the operator in the unenviable position of having to sell a network or a network to survive all the gross debt accumulated over the past 25 years. And with rising interest rates, the need to sell has become even more urgent.

A bidding war

In recent months, Telecom Italia found itself at the center of an online bidding war pitting state lender Cassa Depositi e Prestiti SpA, or CDP — essentially a government investment vehicle — against KKR, which emerged as the tentative winner with a bid deemed superior in terms of price, execution and timing.

The US company is in exclusive talks with Telecom Italia, and the operator’s board has given chief executive Pietro Labriola a mandate to seek an improved, binding offer by September 30, all of which seem to point to the deal being completed. change their future prospects.

The value of the likely deal is as much as 23 billion euros, people familiar with the matter have told Bloomberg. The offer includes about 2 billion euros in performance-based “earnings” and an additional 2 billion euros if a complex set of service contract agreements and changes to the network unit’s debt structure go through, the people said.

Additionally, the Abu Dhabi Investment Authority is in talks to join KKR in its bid for Telecom Italia’s network, people with knowledge of the matter told Bloomberg. Advanced negotiations are underway.

But what’s at stake seems to exceed even that value. The network, essentially a digital highway, handles every phone and Internet session that starts or ends in Italy, Europe’s third-largest economy. Given the potential future value of the assets involved, not to mention the strategic implications, no other European airline has ever seriously considered selling its network.

This has put the Italian government front and center in the battle over the deal. And while the role of state lender Cassa Deposit appears to be waning, the administration led by Prime Minister Giorgia Meloni clearly wants to maintain healthy oversight of the network.

It could come through local players such as Milan-based infrastructure fund F2i SGR SpA, whose shareholders include public entities. In fact, F2i has already begun talks with KKR about a possible minority stake in the network, people with knowledge of the matter told Bloomberg last month.

France’s dilemma, but several hurdles remain.

Rome has veto power over strategic asset deals, and the government’s desire to protect the airline’s 40,000 workers means any bid without state support faces significant hurdles.

The online deal looks even more complicated given the strong opposition from Vivendi SE, the airline’s largest shareholder. The French media group has repeatedly warned that it will not accept an offer of less than 30 billion euros for the network.

As Telecom Italia’s best investor, Vivendi has several options. That could prompt the carrier to turn to a takeover plan that includes all current applicants. Or it could take an alternative route, possibly including selling Tim SA, the airline’s Brazilian unit, the people said. It may also seek a reshuffle of the board, which may bode ill for the CEO.

Regardless of the outcome of the online battle, the operator will not look the same after the dust settles.

“Telecom Italia’s future is now mostly linked to its ability to be more agile and attract new customers with more profitable services,” said Laura Rovizzi, CEO of Rome-based strategy and regulatory consultancy Open Gate Italia.

And the operator’s services unit, basically all that would be left of Telecom Italia after the network sale, would probably have to weigh a restructuring agreement with the technology company to ensure its competitive footprint, he added.

With so much uncertainty ahead, Telecom Italia probably has only one safe bet. The operator is not trying to buy Apple again.