Katharina Nolte
ADVANT Beiten
katharina.nolte@advant-nctm.com

Vittorio Noseda

ADVANT Nctm, Milan
vittorio.noseda@advant-nctm.com

Introduction

A robust broadband infrastructure is vital for a country’s economic growth and technological advancement. With this in mind, the Italian government has set the objective of ensuring broadband internet access for every household.

In pursuit of this goal, the government has chosen to prioritise the expansion of fibre networks directly to homes (fibre to the home (FTTH)), rather than relying on copper cables or mixed technologies (such as fibre to the cabinet etc).

What makes this initiative distinct is the Italian government’s aim to establish a single fibre network, instead of having more than one competing networks as in most other countries. Currently, the idea has gained a tangible shape through a memorandum of understanding.

This article seeks to provide an overview of the progress towards a singular fibre network in Italy, with a focus on some of the obstacles that still need to be overcome.

The current state of the fibre network and the need to innovate

Italy still lags behind in the area of digital transformation. The existing infrastructure in Italy has not yet risen to the challenge of securing broadband internet access for every household. Italy still ranks among the Organisation for Economic Cooperation and Development (OECD) countries with the poorest fibre coverage for households. As of 2022, the FTTH coverage stood at only 44 per cent^[1] and the actual household connection to FTTH was at 12.5 per cent. ^[2]

So far, the expansion of the ultra-broadband networks is unfolding, on the one hand, through private operators in primarily urban regions deemed profitable for them, in particular by Telecom Italia Mobile (TIM) and 'Open Fiber'. Present shareholders of Open Fiber (specifically founded in 2015 by the Renzi Government in order to stimulate competition in the rollout of fibre) are Cassa Depositi e Prestiti (CDP) with a 60 per cent share and Macquarie with a 40 per cent share ^[3] Open Fiber is currently the most important fibre operator and has secured the coverage of the fibre network primarily in so-called 'white' and 'grey' spots through several bidding processes. These are regarded as market failure zones and are areas that have so far been supplied with no or only low access speeds. Concurrently, the former monopoly and telecommunications giant 'TIM' is constructing its independent fibre network, having partnered with several companies to form the infrastructure joint venture 'FiberCop'. The main and relative majority shareholder of Telecom Italia is the French company Vivendi, holding a 23.7 per cent share, followed by CDP with a 9.81 per cent share.^[4]

While a privatised infrastructure and competition among operators are considered successful in the mobile communication sector and generate good network coverage and low prices for consumers, the situation differs with broadband connections. In contrast to mobile communications, each individual household requires its own connection, with extremely high investments.

The delay in the rollout of fibre and the need to help reduce the huge TIM’s debt has resurfaced plans for a single fibre network in Italy.

The hypothesis of a single fibre network

Italy has elevated the expansion of fibre to a matter of national significance. The plan for a single network rests upon four key points: foremost, to keep it national yet separate from operators, and it must be comprehensive yet individual. The concept of a single fibre network entails the amalgamation of the Italian telecommunications infrastructure into a single company. This would require vesting complete control over both the copper and fibre networks into the hands of a sole operator.^[5]

The déjà vu effect

The idea of a single fibre network has been a recurring topic since the liberalisation of the telecommunications market, seeing almost 20 years of projects, plans and political pressure. After so many years, the impression of missed opportunities persists; all previous attempts have not been successful, either because the goal of political control took precedence over digital advancement or because the timing was not right^[6]The spotlight is on the established Italian telecommunications provider, TIM, and its now enormous debt burden of over €20bn, which could be significantly reduced through the network separation project.^[7]

As a special advisor to the then-Italian Prime Minister Romano Prodi, Angelo Rovati first proposed a network infrastructure unbundling from TIM with the involvement of Cassa Depositi e Prestiti to address its debt burden in the Rovati Plan of 2006. However, due to resistance from TIM shareholders, it was never realised. Then, the Italian Deputy Minister for Economic Development, Paolo Romani, attempted once more, in 2009, with the Romani Plan for broadband expansion, but it was also unsuccessful. The project focused solely on addressing the digital divide in areas of market failure and did not sufficiently address the fibre network, thus lacking adequate support.^[8]

Even the Ring Plan for a public fibre network in 2015 ultimately remained shelved. It envisioned a new-generation Italian network (‘the Ring’) under state control, designed to establish an FTTH-based network. However, after extensive criticism, the project took a different direction, resulting in the creation of Telecom Italia’s fibre competitor, Open Fiber^[9].

The current impetus (‘the Netco Project’) appears to have been initiated by the former Minister for Economic Development, Carlo Calenda, after an ordinary shareholder meeting at TIM voted in favour of the network integration project despite resistance from the majority shareholder Vivendi. The current endeavour specifically revolves around the integration of the fixed-line assets of the former telecommunications monopoly, TIM, with those of the state-supported operator, Open Fiber, to form a single network. Thus, the notion of a unified network initially encompasses the reorganisation of the TIM network possibly followed by its merger with the operations of Open Fiber.^[10]

The French majority shareholder of TIM is considered a major obstacle to the project’s implementation. Between late 2018 and early 2019, Vivendi consistently expressed its dissatisfaction with the planned project and increased pressure on TIM’s board of directors, leading to a temporary ceasefire negotiated on 29 March 2019, among shareholders. Vivendi agreed to support the single network project with Open Fiber 'as long as the conditions are correct and fair from an operational, financial, and regulatory perspective and are monitored by a board of directors'.^[12] Calenda referred to it as 'an epochal fact: For twenty years, Italy has been talking about it, and for the first time, there’s a rational and clearly articulated plan envisioning the establishment of the network company'. ^[12]

Current development –The Netco Project

Following TIM’s announcement in March 2018 about its plan to establish a legally separate wholesale company, known as Netco^[12] the creation of a national fibre wholesale network is currently in the phase of separating the TIM network and establishing the Netco company. For this purpose, TIM is expected to merge its entire network – the national copper network, the fibre network (FiberCop), and the international network (Sparkle) – into the yet-to-be-established Netco company. ^[14] Resources and activities not transferred to Netco by TIM will remain with a separate company owned by TIM and operating at the end-customer level, referred to as ServCo.

Currently, the specifics of the share distribution in Netco are still uncertain. Telecom Italia, the state investment bank CDP and private equity firms KKR and Macquarie signed an agreement at the end of May 2022 to engage in exclusive talks regarding a potential acquisition. ^[15]

Presently, TIM has a non-binding offer in a memorandum of understanding signed by the US fund KKR and the Italian Ministry of Economy and Finance (MEF) for a joint acquisition. According to this, MEF is set to participate in Netco with up to 20 per cent ownership. A binding offer is expected to be submitted by the end of September 2023. As per the current offer, TIM’s infrastructure is valued at €21bn, with an option to increase it to €23bn if there were to be a subsequent merger between Netco and Open Fiber. ^[16] The memorandum of understanding also outlines the participation of MEF alongside KKR in the consortium, ensuring that the Italian government would play a pivotal role in future strategic decisions of NetCo. For this purpose, the Italian Council of Ministers (CDM) passed a legislative decree at the end of August, which ensures that MEF has the necessary financial means to enter the Netco Project.^[17] By mid-September, the decree of the Italian Prime Minister is expected to be signed, determining the company’s economic scope and granting approval to MEF to join the consortium for the purchase of Netco, thereby enabling the process to proceed. ^[18]By mid-September, the decree of the Italian Prime Minister is expected to be signed, determining the company’s economic scope and granting approval to MEF to join the consortium for the purchase of Netco, thereby enabling the process to proceed. It is conceivable that MEF will hold 20 per cent of Netco. To maintain the Italian character, the infrastructure fund F2i (with 15 per cent) and Cassa Depositi e Prestiti (with three per cent) could also enter the deal, given that CDP, alongside Macquarie, holds a majority stake of 60 per cent in Open Fiber.^[19]

The EU perspective

From a European legal perspective, the topic remains complex.

First, the Netco Project, whose declared goal is the later merger with Open Fiber, will have to be notified to the European Commission under the merger control rules, prior to its implementation. The transaction might raise competitive concerns, due, inter alia, to the (highly) concentrated nature of the market for the provision of wholesale broadband services and the high market shares held by TIM and Open Fiber in that market.^[20] Thus, remedies might be offered by the parties to obtain clearance by the European Commission.

Moreover, the time-intensive and complex nature of the project threatens to jeopardise the implementation of the Italian Recovery and Resilience Plan (PNRR Plan) of the two telecommunications operators, TIM and Open Fiber^[21] . The PNRR Plan consists of a total of six missions and is an important instrument for Italy due to its large scale of over €210bn.^[22] The telecommunications operators’ package alone received €46.3bn. However, the specific allocation of funds from the EU recovery package is subject to numerous criteria ^[23] and the Italian government would appear to be on a delay. The consequence of non-implementation could be the potential repayment of funds received so far.

In addition, with the now revealed direct involvement of MEF, European state aid law also comes to the forefront. Any investment by MEF in the Netco Project constitutes the use of public funds and, therefore, should not amount to an illegal state aid.^[24] To avoid being classified as prohibited favouritism, the state involvement must be carried out in line with market conditions. Essentially, state aid law requires a market-oriented return on a public investment^[25]; therefore, it is crucial that the price of the shares in Netco reflect its actual value, which leads directly to the next issue, namely the existing valuation differences.

The ministerial decree authorising the involvement of the Ministry in the NetCo, expected by the end of September 2023, aims to solve the most important issues in this regard, particularly compliance with state aid and the procurement of financial resources.

The valuation issue

The TIM network, as such a widely spread infrastructure, is a unique asset whose value determination is complex. According to calculations by KKR, at least €7bn of investment are necessary to fully replace copper cables with fibre and to expand coverage in Italy. ^[26]

The current market capitalisation of the entire TIM ranges between €5bn and €6bn. In contrast, the value of the network alone fluctuates, according to analysts, between €18bn and €31bn, making it the largest asset of TIM. TIM’s largest shareholder, Vivendi (23.7 per cent), argues that the network is worth €31bn.^[27] KKR has now made an offer of €21bn, a sum that could increase to €23bn upon the fulfilment of a series of conditions. ^[28]

The fact is that the valuation provided by KKR for Netco is in clear disproportion to Vivendi’s expectations. However, it is also a fact that Vivendi remains the relative majority shareholder of TIM regardless of this, making diplomatic discussions unavoidable.

The Vivendi question

One of the big hurdles for the realisation of the Netco Project, involving the separation and semi-nationalisation of the TIM network, is currently Vivendi, the French shareholder, and at 23.7 per cent ownership, the majority shareholder of TIM.

From Vivendi’s perspective, the price offer from KKR (between €21bn and €23bn) is significantly lower than their expectations (well above €30bn). The number of employees and the total level of debt in TIM and Netco should also be negotiated in detail as part of the wider 'value consideration'. The positions are firmly entrenched in this regard.

However, a glimmer of hope comes from the revealed involvement of MEF in the project. As evidence that the tone has become more conciliatory, sources close to Vivendi commented that direct government involvement is seen as a positive development. They also emphasised that it is now necessary to engage in serious dialogue with Vivendi to reach concrete and practical solutions. This indicates that Vivendi seems to be open to discussions with KKR and MEF to agree on the terms of acquiring the network company and discuss the sustainability of ServiceCo. ^[29]

Conclusion

The future of the fibre network in Italy holds promise as both the government, key investment funds and top companies are starting to seriously invest themselves in the (One Fiber) Netco Project. However, the path ahead is still long. The development of a single fibre network is not without its challenges. Bureaucratic obstacles and differing interests among the companies involved contribute to slowing down or hindering the process. Many variables come into play, starting with the composition of Netco, pricing issues, HC and debt-related issues, competition and state aid issues...in short, it is still a long way to Tipperary.

Notes

[1]  European Commission (2023): 2022 DESI Report – Electronic communications markets overview per Member State (Telecom Chapters), Italy.

[2]  European FTTH/B Market Panorama 2023 at https://www.ftthcouncil.eu/knowledge-centre/all-publications-and-assets/1707/european-ftth-b-market-panorama-2023

[3]  'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno' La Stampa, 12 August 2023.

[4]  'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno', La Stampa, 12 August 2023.

[5]  'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno', La Stampa, 12 August 2023.

[6]  'Tim, sullo scorporo della rete la parola a Vivendi' Il Sole 24 Ore, 7 February 2018.

[7]  'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno', La Stampa, 12 August 2023.

[8] C Fotina, 'Telecom, progetti segreti e pressioni della politica: 20 anni di guerre sulla rete' Il Sole 24 Ore, 13 November 2018.

[9] C Fotina, 'Telecom, progetti segreti e pressioni della politica: 20 anni di guerre sulla rete' Il Sole 24 Ore, 13 November 2018.

[10]  'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno', La Stampa, 12 August 2023.

[11]  'Optical fiber in Italy: Which path to take?' AWARE, February 2021 at https://www.awarethinktank.it/wp-content/uploads/2021/04/Optical-Fibre-in-Italy.pdf

[12]  'Tim, sullo scorporo della rete la parola a Vivendi' Il Sole 24 Ore, 7 February 2018.

[13]  European Commission (2020): 2020 DESI Report – Electronic communications markets overview per Member State (Telecom Chapters), Italy.

[14]  'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno' La Stampa, 12 August 2023.

[15]     I Struta, 'Italy pushes for single fiber network infrastructure approach' S&P Global at https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/italy-pushes-for-single-fiber-network-infrastructure-approach-70803578.

[16]    'Italy’s Ministry of Economy and Finance signs MoU with KKR to take up to 20% stake in Telecom Italia’s NetCo” Mergermarket, 11 August 2023; M. Follis, “Rete Tim, a meta’ settembre l’ingresso del Mef. Labriola al lavoro per alzare il prezzo di N” La Stampa, 12 August 2023.

[17]    'Tim: via libera Cdm a provvedimenti per ingresso Mef in NetCo' MEF, 29 August 2023.

[18]     M Follis, 'Il Tesoro nella rete della Tim rilancia il duello con Parigi' La Stampa, 13 August 2023.

[19]    T De Stefano, 'Rete Tim, ora tocca a Eliseo e Chigi. Prove di intesa anche con Vivendi' La Verita, 12 August 2023.

[20]    State Aid SA.63170 (2021/N) – RRF – Italy – Plan 1 Gbps, see par 34.

[21]  I Genna, 'Tra aiuti di Stato e Pnrr, Bruxelles vigila sull'operazione' La Stampa, 13 August 2023.

[22]     European Commission (2023): 2022 DESI Report—Electronic communications markets overview per Member State (Telecom Chapters), Italy.

[23]     Next Generation Italia, 'il Piano per disegnare il future del Paese' MEF, 18 January 2021 at https://www.mef.gov.it/focus/Next-Generation-Italia-il-Piano-per-disegnare-il-futuro-del-Paese/.

[24]    AEUV art.107.1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

[25]    I Genna, 'Tra aiuti di Stato e Pnrr, Bruxelles vigila sull’operazione' La Stampa, 13 August 2023.

[26]    S Bennewitz, 'Tim, la cautela del Quirinale sul rischio di attriti con la Francia' La Repubblica, 12 August 2023.

[27]    'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno', La Stampa, 12 August 2023.

[28]      'Con la rete unica in fibra l’Italia risparmierebbe 111 milioni l’anno', La Stampa, 12 August 2023.

[29]     R Dimito, 'Rete Tim, Vivendi apre all’arrivo del Mef ma pone vincoli su prezzo e struttura' Il Messaggero, 12 August 2023, p.14.