Does TIM separation point to a wider trend?
Italy’s TIM has outlined its plans for splitting its company into a NetCo to provide fixed national and international wholesale network infrastructure, and a ServiceCo for its consumer and enterprise services and its Brazilian business. But the move raises questions.
The separation will make TIM a member of a small club of telcos worldwide that have separated their network infrastructure from their services business, including BT in the UK, TDC in Denmark, Telkom in South Africa, Telecom New Zealand and CETIN in the Czech Republic.
Ideally, TIM wants to combine its NetCo with Italy’s wholesale fiber network operator Open Fiber “in order to unlock sizable synergies and allow full valorization of TIM’s infrastructure network … but only if executed at attractive terms to both equity/debt holders,” according to TIM’s CEO, Pietro Labriola, during TIM’s Capital Market Day presentation 7 June. Failing that, TIM would consider selling its NetCo to private investors, “given the proven appetite currently showed for the asset class.”
And indeed “the evidence from the Czech Republic and New Zealand is that [separation] does create value for shareholders,” says Mark Newman, Chief Analyst, TM Forum. “But they are only two small examples and Italy is obviously a much bigger market than the Czech Republic or New Zealand.” In addition, at the end of May this year, the European Commission informed O2 CZ, T-Mobile CZ, and CETIN “of its preliminary view that their network sharing agreement restricts competition in breach of EU antitrust rules”.
Newman agrees that there is a large appetite among investors for digital infrastructure, which until now has centered on telco tower acquisitions. “But it could also mean the network part of telecom operators, and we do hear murmurings of a lot of money being put into funds to own digital infrastructure assets.”
Especially as operators can use separation as a financial instrument to ensure the well-being of the company. “We may see [a trend of] telcos voluntarily creating a netco and a servco to fend off a hostile takeover,” says Newman.
In its presentation to investors, TIM was particularly bullish about the impact of separation on enterprise growth and its ability to shift its revenue mix towards cloud services.
What is currently unclear, however, is how TIM’s enterprise and retail service arms will tap into exposed network assets once they are no longer integrated with a network provider.
Indeed, “the lines between a servco and a netco could start to blur because telcos want to expose their network assets to enterprise,” according to Newman.
After all, future regulatory considerations aside, an independent wholesale network provider’s interests should be best served by offering its network assets to all potential customers.
For TIM’s struggling retail business in particular competition “might be very, very tough,” believes Newman. At the same time, however, “it could ultimately be good discipline because it exposes the retail business and forces it to become leaner and more profitable.”