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Remarks: Telecom Italia at crossroads through the network of the future

MILAN (Reuters) – Italy is pushing to use a single ultra-fast broadband operator by the merge of Telecom Italia’s copper and fiber network with smaller rival Open Fibres, to avoid duplicate investment and narrow the digital gap with Europe.

FILE PHOTO: A Telecom Italia control unit for the fiber optics is to be seen in Perugia, Italy, June 23, 2017. REUTERS/Alessandro Bianchi/File Photo

But the future of Telecom Italia (TIM) network has become a major bone of contention between the telephone group of shareholders, Vivendi and activist fund Elliott.

Elliott wants TIM to spin-off of the network and merge with the Fiber. Vivendi is not against a merger, but insists on TIM keeping control of its biggest asset.

The Italian state lender Cassa Depositi e Prestiti (CDP), co-owner of Open Fiber with utility Enel, recently was TIM ‘s No. 2 shareholder to oversee Rome’s interest in a company is seen as strategic. CDP is excited about the internal network project.

The idea of a spin-off of TIM’s networks has flirted with several times in the past ten years and was last seriously tried in 2013, before it was eventually abandoned.

TIM Chief Executive Luigi Gubitosi said in February all options on the network could be evaluated.

Below are a number of possible outcomes:

TYING THE KNOT

A merger between TIM’s network and Open Fiber would be an almost-monopoly for the roll-out of broadband in Italy, but such a step could prove difficult to implement. TIM network is valued at a maximum of 15 billion euros (17 billion dollars), I think, relative to a valuation for the newcomer Open Fiber of more than 2 billion euros.

Every day that passes the value of the copper part of the TIM network loses value as more and more customers migrate to fibre.

TIM is saddled with more than 25 billion euros of the debt, and employs approximately 50,000 people in Italy. The removal of TIM ‘ s network, would be a services stub with a potentially inflated number of staff and the debt of the stack that would struggle to compete with leaner rivals.

Elliott said a network spin-off would unleash up to 7 billion euros in the hidden value, the attracting of new investors and drive a re-rating of shares — estimates some critics called optimistic.

Vivendi doesn’t want TIM to lose control of the network, because this is considered strategic for the implementation of the fifth-generation (5G) mobile services. Regulator AGCOM last year said that it was opposed to TIM keeping control of the network as it would also have “a significant competitive advantage”.

THE RAB RIDDLE

Italy has said that it would be able to arrange a potential internal network, such as an energy grid offers state-guaranteed rates of return on a regulated asset base (RAB) model to entice players on board and create Europe’s first RAB-rewarded high-speed grid.

Proponents say that because of the enormous costs involved in the roll-out of fiber across the country, operators will require a RAB-like system to ensure investment and funding.

Critics say that such a system is difficult to perform because it is a monopoly and the convince of all the network players of club assets. Broadband services, in contrast to energy, are not the basis of the raw materials, and customers can choose to opt for a cheaper or alternative services such as mobile Internet, as the prices rise.

FIBER ONLY

An alternative would be a merger of Open Fiber with TIM’s fiber-only assets that would be a cleaner and easier fit. Former CEO TIM Amos Genish, and Enel CEO Francesco Starace had discussed this option, sources have said.

A FRIENDLY COEXISTENCE

Another option is for TIM and Open Fiber to work together in trade and the conduct of co-investments, but without going to the altar. Talks in that regard are ongoing.

One possibility is for an Open Fiber to build its network in non-economically viable, and then to rent out to TIM who would channel customers to the line. In return, TIM would Open Fiber access to its network, particularly in urban areas.

($1 = 0.8909 euros)

Reporting by Agnieszka Flak and Stephen Jewkes; Editing by Keith Weir

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