Elliott Said to Back Ferrari-Like Spinoff for Telecom Italia

Updated on
  • Hedge fund wants phone carrier to give up fixed grid control
  • Plans would be IPO of network and involvement of state lender

Billionaire Paul Singer is finding inspiration in Italy’s best-known brand -- Ferrari -- to maximize returns from his latest investment.

Singer’s Elliott Management Corp. is studying a plan to separate the fixed-line network of Telecom Italia SpA that includes an initial public offering by the end of 2019 and wants to reduce the carrier’s stake in the grid to a minority, according to people familiar with the activist’s plans, who asked not to be identified because the plans aren’t public.

The move would mirror a strategy pursued by Fiat Chrysler Chief Executive Officer Sergio Marchionne at Ferrari in 2016, when the carmaker spun off the sports-car unit to investors, more than doubling the market value for its shareholders. Elliott now owns about 5 percent of Telecom Italia and may almost double that holding to gain a stronger voice in the company as it pushes for a board shakeup, the people said.

Singer’s funds held 5.74 percent in Telecom Italia as of March 15, according to a filing with Italian market regulator Consob published on Wednesday.

Elliott has set up a showdown with Telecom Italia’s largest shareholder, the French media conglomerate Vivendi SA, which owns 24 percent. The fund has proposed ousting the carrier’s chairman, Arnaud De Puyfontaine, and five other directors and replacing them with six independent board members. The confrontation is set to come to a fore at the annual shareholders meeting in a month’s time.

A Milan-based spokeswoman for Elliott declined to comment.

Elliott suggested separating and selling part of the former monopoly’s network unit in a letter to shareholders last week, without specifying the size of the interest it would want Telecom Italia to keep. The goal is to boost the carrier’s value with a sum-of-the-parts approach to extract the highly-valued landline network, the people said. A listed network with Telecom owning a minority interest could grant similar returns to those secured by Fiat with the Ferrari separation, the people said.

Elliott’s proposal may come into conflict with an existing plan by Telecom Italia executives to separate the network but keep full control of the business. The carrier’s final proposal will be filed to Italy’s communication regulator AGCOM by the end of March, according to two people familiar with the matter.

Telecom Italia Chief Executive Officer Amos Genish said this month that the company is examining a potential IPO of the grid but it would be premature to make a firm decision as the network separation could take 18 months. “They cannot ask us to run before we walk,” Genish said in an interview.

A Rome-based spokesman for Telecom Italia declined to comment.

Telecom Italia’s network is valued at at least 15 billion euros ($18.4 billion) by analysts at Mediobanca SpA. That’s more than 90 percent of the current market value of the Milan-based company. A spunoff network could be granted firm tariffs by regulators, giving the company a stable profit base and making it attractive for infrastructure funds, the people said.

Pure-play infrastructure businesses usually command lofty valuations. Terna SpA, the electric grid that was spun off by Italian utility Enel SpA in 2008, is valued at about 10.8 times its expected earnings before interest, taxes, depreciation and amortization according to data compiled by Bloomberg. That compares to a multiple of 6.5 times for Enel and 5.5 times for Telecom Italia.

Elliott’s plan may include ceding to the network company about 10 billion euros of Telecom Italia debt and several thousand workers, the people said. Italian state-owned lender Cassa Depositi e Prestiti may eventually buy a holding in the grid business, the people said.

— With assistance by Scott Deveau

(Adds Elliott filling to regulator in fourth paragraph.)
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