TIM plots enterprising approach after NetCo sale

Every now and then, rumors pop up in the media that Telecom Italia (TIM) is exploring the sale of a stake in its enterprise services business, as part of ongoing efforts to restructure the Italian group and reduce debt.

First, UK-based CVC Capital Partners proposed buying a 49% stake in a future services company that would encompass enterprise services as well as Noovle, Olivetti, Telsy and Trust Technologies. That bid was ultimately rejected.

Then, in September 2022, Reuters reported that TIM had set out to launch a sale process for a minority stake in its enterprise service arm. More recently, in June, it was reported that TIM had revived these efforts, and had sent invitation letters to sound out potential investors.

As things stand, TIM's management seems to be keeping its powder dry on enterprise as it focuses on completing the proposed sale of its fixed assets, dubbed NetCo, to US private equity firm KKR. On that topic, Italian newspaper Il Sole 24 Ore reported that KKR has contacted the Canada Pension Plan Investment Board (CPPIB) about participating in the NetCo investment. KKR has until the end of September to submit a binding offer.

High potential

Once the sale of NetCo has been completed, TIM's managers will be able to fully turn their attention to the service businesses that remain. TIM CEO Pietro Labriola has already indicated that enterprise is one of the more interesting areas for investment – presumably in part owing to the rampant competition in the Italian consumer market in recent years.

In an interview with Il Sole 24 Ore to discuss TIM's results for the second quarter (Q2) of 2023, Labriola said the Group is evaluating operations that can accelerate TIM Enterprise's growth. "What shape they will have remains to be seen, we certainly don't want to deprive ourselves of a distinctive asset with high potential," he said (according to Google Translate).

The TIM Enterprise organization was only formally established in March 2023, and is potentially valued at more than €6 billion (US$6.6 billion), according to a June report from Bloomberg. The unit is one of four separate entities at TIM, along with TIM Consumer, NetCo, and TIM Brasil.

In the first half (H1) of 2023, TIM Enterprise accounted for €1.39 billion ($1.53) of total Group revenue of €7.8 billion ($8.6 billion). In Q2 alone, enterprise revenue increased 0.4%, which represented a slowdown compared to the first quarter.

However, Labriola pointed out that enterprise is completely different from the consumer business because it can take so long for contracts to be signed. Those contracts would then have a duration of up to seven years in some cases, he said. It's therefore necessary to take a longer-term view of business development here, he indicated.

He noted that the pipeline "is very strong with around €1 billion [$1.1 billion] from ongoing negotiations." Around €300 million ($330 million) of this relates to Polo Strategico Nazionale (National Strategic Hub), which is responsible for the project to migrate public administrations in Italy to the cloud.

Polo Strategico Nazionale or PSN is owned by TIM (45%), Leonardo (25%), Cassa Depositi e Prestiti (CDP; 20%) and Sogei (10%). PSN is among the main initiatives of the Italian Cloud Strategy with the goal of getting 75% of Italian administrations to use cloud services by 2026.

"This is slightly delayed," Labriola said, but he noted that the project will more than compensate for the loss of revenue from the supply of cloud computing services under the previous Public Connectivity System (SPC), "which is about to expire."

Meanwhile, TIM is also finding that traditional connectivity services no longer cut the mustard for enterprise. Growth is all about cloud and cybersecurity, to mention two key areas, as well as ICT services.

In H1 2023, connectivity accounted for 42% of enterprise revenue, but fell 6% year-on-year. Cloud, meanwhile, grew by 13% and now accounts for 30% of the business, while "other IT" increased 8% and has a 23% share. Security grew by 5% and still only has a 3% share, but cybersecurity is pegged as a future growth driver.

During the Q2 earnings call, Labriola said the ICT growth strategy is to "keep investing in our business and delivery models to stay ahead of the market. A key area of focus is our cloud services portfolio, where we are adopting market trends by strengthening our multi-cloud offering."

He also told Il Sole 24 Ore that TIM Enterprise is "focusing heavily on the smart city model. I believe this is an area with great potential, on which we can have a strong impact thanks to our technologies, from cloud to edge computing to cyber-security."

Overall, TIM remains confident that its enterprise unit will exceed expected market growth of about 4% in the medium term.

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— Anne Morris, contributing editor, special to Light Reading