Home Business TIM: network separation vs KKR offer? Barclays weighs the two scenarios. Title struggling with key support at € 0.40

TIM: network separation vs KKR offer? Barclays weighs the two scenarios. Title struggling with key support at € 0.40

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TIM returns to the lows of January 20 in the area of ​​€ 0.405 with investors confused by the scenario of uncertainty about the future scenarios of the major Italian telecommunication system. The tops in the 0.50 area reached on 24 November following the announcement by KKR of its intention to launch an offer to take over control of TIM are far away. Since the beginning of the year, TIM has recorded almost -7%.

On the board of directors of January 26, the new CEO Pietro Labriola outlined a new business plan which plans to separate infrastructure from services. The guidelines of the plan that will be brought to the board on 2 march focus in particular on the transformation of the consumer offer, focus on business services, cloud, IoT and cybersecurity and cost control. In these months Labriola, in addition to working on the industrial plan to 2024, will be involved in the drafting of the annual balance also expected for March. As reported in a note “the plan will serve as a basis for evaluating the alternatives: on the one hand the strategic option identified by the CEO, on the other the Kkr offer”.

In fact, there are two main ways that society can take to recover: 1) the division of the domestic business between NetCo and ServiceCo, 2) accept the Kkr’s proposal, but it would appear that an official response on the matter will not arrive before the final approval of the plan. On the proposal of the American fund, the Board reports that the committee set up ad hoc is continuing with the work to analyze and evaluate the proposal, to compare it with the prospects of the group and with the various strategic options currently on the table.

How much could the two lines NetCo and ServiceCo be worth?

Barclays analysts, although there are still few details on financial data, have made estimates and assessments on NetCo and ServiceCo.

Per ServiceCo (commercial activity), the British investment bank estimates a potential Enterprise Value (EV) a € 12.8 billion, given that it appears high to analysts given ServiceCo’s low margin. NetCo (infrastructure activity) would include a broader perimeter and analysts arrived at an estimate of EV in a range between 16 and 29 billion euros, this using the discounted cash flow (DCF) valuation method. Finally, the company has already carved out a part of the network in a named company FiberCop, in which he sold a 38% stake to Kkr for an EV of € 7.7 billion, in line with barclays’ assessment.

The analysts of Barclays believe that the structural separation of activities with the spin-off of the lines and the network may allow investors to better evaluate these assets. Furthermore, the separation could also allow the controversial merger with Open Fiber, because in this case Vivendi would no longer oppose the loss of control of NetCo. Even for Kkr, which owns 37.5% of FiberCop, this could be a positive result. Barclays thinks that the stand-alone plan, if judged credible, could limit the risk of a downside in TIM’s share price in which an agreement with KKR does not materialize.

Telecom management will present the plan in March and, according to analysts, it will be a good occasion to try to elaborate a plan and a strategy autonomous, which could offer an interesting alternative to the offer presented by Kkr in November 2021. Barclay keeps the “neutral” rating on Telecom Italia unchanged, with a target price di 0,27 euro to action. Level that does not take into account a possible success of the agreement with Kkr.

There are many important scenarios and risk factors for society: the consolidation in Brazil, the NetCo / ServiceCo separation even if there is still no agreement with Open Fiber. Another risk factor could be the merger, to date denied, between Iliad and Vodafone, in addition to the new Iliad offer. Finally, it will be important for society to look at the outcome of the presidential elections.

The majority (12) of the analysts involved by Bloomberg indicate that they keep “Hold”, 8 are “Buy” on TIM and only 2 are “Sell”. On average, the 12-month target price is € 0.44, with a potential upside of around 7% compared to current prices.
The most optimistic on Telecom are the analysts of Intermonte (target price at 60 cents) and HSBC at 0.50 euro. In addition to Barclays, the most pessimistic on the stock remain BNP and Equita SIM with a target price of € 0.30.

Technical analysis: the holding of the 40 cents is fundamental

Delicate phase from a technical point of view for Telecom Italia. The large gap up between the sessions of 19 and 22 November 2021, triggered by the euphoria for the takeover bid launched by the Kkr fund, led the stock to touch 51 cents, the highest for over two years. From here began one phase of uncertainty which recently took an even faster turn, taking Tim to the test of the key support in the 40 cents area. The break of this level, where the 200-period moving average also transits, would trigger a clear bearish signal, with a possible descent towards 35 cents, thus closing the large gap. On the upside, exceeding 42 cents could give a first positive signal with a target of 46 and 50 cents, thus returning in line with the price of the Kkr takeover bid (0.505 euros).

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