Our Research Department returns to the topic with further evaluations and insights on the subject. Today we explain why the KKR fund’s offer on Telecom Italia should be relaunched.
Last weekend the KKR fund presented a non-binding and indicative expression of interest for a takeover bid on 100% of Telecom’s shares at a price of 0.505 euros per share. The objective of the fund is to get to hold at least 51% of the ordinary shares and 51% of the savings shares. The final objective of the fund would be the “delisting”, that is the term of the listing on the stock exchange for the Telecom Italia shares.
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There are all a series of conditions that have been inserted by the potential buyer, such as reaching the minimum membership threshold of 51% of the share capital of both share categories (ordinary and savings). Other conditions are the performance of a confirmatory due diligence of about four weeks and the approval by the relevant institutional subjects (we remind you that the Government Authority holds the Golden Power).
Given the above, to understand if KKR’s offer is adequate, we evaluated the target company (Telecom Italia) using various methodologies. Strategic-operational valuation, equity valuation, economic-financial valuation using the discounted cash flows method and comparison method. Here are the first results:
Why the offer of the KKR fund on Telecom Italia should be relaunched. Strategic-operational evaluation
As mentioned in this item of last November 25, the company is active in strategic sectors for the Italian national interest but also internationally in a European and Euro-Atlantic perspective including the NATO pact.
We know that among the themes most dear to investors, at a macro-trend level, are broadband, Internet of Things (IOT), smart cities, cybersecurity, cloud, big data, self-driving vehicles, etc. . The services offered by Telecom Italia and the infrastructures at its disposal place it right at the center of this economic-technological revolution that we are already witnessing. Telecom Italia, leads the digital revolution in the country. This positioning alone is sufficient to guarantee Telecom Italia an economic moat, ie an important competitive advantage. This will also allow it to be among the first beneficiaries of PNRR-related investments whose missions include the aforementioned sectors.
Asset valuation
From an equity point of view, the company has a capital value of around € 26 billion, which translates into a book value per share of € 1.24. Gross assets are around € 73 billion, liabilities around € 47 billion. The debt amounts to approximately 26 billion euros (in a ratio of approximately 1: 1 with the capital).
As mentioned in the previous article, we consider this book value as the minimum price (floor) from which to start a possible evaluation. In fact, pursuant to IAS 36, business activities must be recognized at a value no higher than the effectively recoverable value. In asset valuation, we usually start from the book value, only to add factors which, although having an influence on the valuation, are not relevant for accounting purposes.
In our opinion, while knowing that there are risks and potential costs that may emerge in the future (risk is part of every business), we must also recognize that there are values that are not recognized by the accounting rules. These are, for example, the growth potential described in the strategic operational assessment above, the value of the TIM brand, relationships and contracts with customers, as well as the fact of operating in contexts with limited competition (practically in an oligopoly regime). The sector in which Telecom Italia operates is highly regulated (think, for example, of the regulation of frequencies, as well as of the various authorizations for antennas and exchanges), and requires significant investments in entry to be able to use the infrastructures.
For the aforementioned reasons, we believe the range of € 1.24-1.47 per share as appropriate for a first equity valuation of Telecom Italia. This is in line with what has been expressed in the article of November 25 of € 1.43 per share.
Economic and financial evaluation
The valuation with discounted cash flows carried out by us leads us to a range of 1.27 – 1.47 euros per share, which is almost in line with the previous equity valuation.
To calculate the cash flows, we neutralized the 2020 result from the tax credit of approximately € 5.9 billion. The tax credit of 5.9 billion euros is indeed an effect only one for the year 2020 as can be seen from the company’s financial statements in note 12:
“Income taxes also benefit from the recognition of deferred tax assets resulting from the tax recognition of higher values recorded in the financial statements pursuant to Legislative Decree 104/2020 art. 110, co. 8 and 8 bis for a total of € 6,569 million (of which IRES for € 5,532 million and IRAP for € 1,037 million) “.
Of the overall € 6.5 billion, the impact on the 2020 income statement was € 5.9 billion.
In the company’s growth estimates, we considered the forecast of an inflationary scenario, in line with current national and global macroeconomic estimates. In addition, it is necessary to consider the current and planned expansive monetary and fiscal policies, the PNRR, and the Covid 19 effect, which benefits operators in the data, internet, telecommunications and technology sectors in general.
Comparison
To complete the analysis, we compared some Telecom Italia multiples with some of its counterparts from other countries such as Verizon Communications and Deutsche Telekom.
| Telecom Italia | Verizon | Deutsche Telekom | |
| P/E | 1,74 | 9,73 | 14,85 |
| P / E fwd | 24,88 | 9,59 | 12,59 |
| PEG | 0,51 | 2,94 | 1,2 |
| Price / Book | 0,4 | 2,78 | 2,05 |
| Price / Sales | 0,68 | 1,6 | 0,75 |
| Company value / revenues | 2,26 | 2,85 | 2,01 |
| Company value / EBITDA | 5,62 | 7,69 | 4,98 |
| Operating margin | 12,27% | 25,29% | 13,93% |
| Debts / Equity | 1,0027 | 2,2804 | 1,7972 |
| Liquidity ratio | 0,82 | 0,97 | 0,99 |
From the table above we see how Telecom Italia is considerably undervalued compared to the other two, both in terms of Price / Book and Price / Sales ratio. Furthermore, the debt on own capital is much lower for Telecom Italia, making it safer and more conservative in terms of leverage and financial risks.
If we used Deutsche Telekom’s price / book ratio, Telecom Italia’s stock would be valued at € 2.51. With the Verizon Price / Book, the Telecom Italia share is worth € 2.41.
Similar speech for the Price Sales report. With the Deutsche Telekom report we get a value of 0.54 euros, with the Verizon report 1.15 euros.
Conclusions
In light of what is expressed in this analysis, we confirm our initial assessment made in the previous one item of 25 November.
The intrinsic value or fair value of any company rather represents a range of values rather than a single number. In fact, corporate valuation is not an exact science, since future variables are multiple and uncertain. Furthermore, corporate issues also include strategic-political interests and negotiation dynamics between potential buyers and sellers that have little or nothing to do with the strictly technical aspects of the evaluation itself.
This is why the KKR fund’s offer on Telecom Italia should be relaunched
For the reasons set out above, we believe that between KKR’s offer of € 0.505 per share and our valuation of € 1.24-1.47 per share, the Telecom takeover bid could be relaunched at an intermediate price that seeks to balance the interests of both sides. This price could be in the range of € 0.80-1.00 per share.
