November 22, 2018 / 8:03 PM / 24 days ago

UPDATE 1-Italy pursues single network idea as jobs issue causes friction

(Adds details, sources on possible network plan)

ROME/MILAN, Nov 22 (Reuters) - Rome was pressing ahead on Thursday with measures to help create a single broadband infrastructure company that could combine the networks of Telecom Italia (TIM) and smaller rival Open Fiber, despite concerns over jobs.

A potential spin-off of TIM’s network and subsequent merger with Open Fiber has been at the centre of a power play between the phone group’s two biggest shareholders - French media group Vivendi and activist fund Elliott.

Italy plans to introduce a framework for the merged network firm similar to a regulated asset base (RAB), which allows regulated returns on investments made.

The legislation proposed last week by Italy’s anti-establishment 5-Star Movement, which took office with ruling coalition partner the League in June, said the size of the new company’s workforce would be one of the factors taken into account in setting regulated tariffs.

A report in daily Il Messaggero on Thursday said as many as 60 percent of TIM’s employees could end up in the network company, possibly prompting heavy restructuring.

“Our objective is to protect employment levels,” Deputy Prime Minister and 5-Star leader Luigi Di Maio said in response.

Rome also issued a statement denying that it had received any secret proposal for the spin-off of TIM’s network and said legislation currently before parliament would make the idea of a single network player an “appetising and sustainable” proposition.

After concern from the League this week that a bloated workforce could mean higher prices for consumers, a new proposal is set to be tabled later on Thursday referring simply to investments to build and maintain the networks.

TIM employs around 50,000 people in Italy at the moment and around 40 percent could be moved to the network company should the phone group’s infrastructure be spun-off as a precursor to a merger with Open Fiber, sources familiar with the matter have said. Open Fiber employs around 800 people.

This would leave TIM’s service operations with a number of employees some sources say is unsustainable and could lead to at least 10,000 job cuts.

Other RAB-regulated entities in Italy such as Snam and Terna employ around 3,000 and 4,000 people respectively.

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The idea of a single network operator has returned to the spotlight after Italy’s anti-establishment government elected in June prioritised the creation of a single broadband network to help Italy catch up digitally with European peers.

The issue was reinforced by activist fund Elliott which took control of TIM’s board in May. One of its board candidates, Luigi Gubitosi, was appointed TIM’s new boss on Sunday and vowed to examine with “speed” the single network idea.

A big question mark remains over the technicalities of such a tie-up and the possible valuation of TIM’s copper and fibre networks. The company believes the assets are worth between 13-15 billion euros, three sources said.

However, Open Fiber would be willing to start any tie-up discussions valuing TIM’s infrastructure at only 7-8 billion euros, two of the sources added.

A major headache in any deal is TIM’s massive debt pile, which stood at 25 billion euros at the end of September.

The merged network entity, which is expected to have core earnings of around 2 billion euros, could shoulder as much as 10-12 billion euros of TIM’s debt, one source said.

TIM declined to comment on the numbers mentioned by sources.

TIM’s former CEO Amos Genish wanted the phone group to retain control of the merged entity, but with Gubitosi in the driving seat the issue may not be a hindering factor any longer.

State lender CDP, which is a shareholder in both Open Fiber and TIM, is seen taking a central role in the merged entity, sources have said.

Reporting by Giuseppe Fonte in Rome and Stefano Rebaudo, Stephen Jewkes and Agnieszka Flak in Milan; Editing by Elaine Hardcastle

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