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KKR has wiggle room to sweeten Telecom Italia bid

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The Telecom Italia logo is seen in Milan, Italy, May 25, 2016. REUTERS/Stefano Rellandini

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MILAN, Nov 24 (Reuters Breakingviews) - KKR’s (KKR.N) jumbo bid for Telecom Italia (TLIT.MI) may get chunkier. The private equity group could have to raise its 33 billion euro offer for the Italian telecom operator to win over investors Vivendi (VIV.PA) and state-controlled Cassa Depositi e Prestiti (CDP). The deal already looks set to be the largest buyout in European history. But the U.S. group can probably pay more without overloading its target with too much debt.

KKR’s offer of 0.505 euros a share has so far not met opposition from the Italian government or the country’s feisty unions. Yet the bid did not go down well with French investor Vivendi read more , which owns 24% of Telecom Italia’s ordinary stock, and paid on average 1 euro for each share. For CDP, which owns 10%, the average purchase price was probably close to 0.70 euros a share.

That means the U.S. buyout shop may have to pay more than the 10.8 billion euros currently on offer. But the competitive Italian telecom market and Telecom Italia’s debt pile, equivalent to around 3.5 times 2021 EBITDA as per Refinitiv data, means KKR can’t use too much extra borrowing to fund the deal. It helps that most of Telecom Italia’s bonds don’t have change of control clauses, meaning they don’t need to be refinanced when the deal closes.

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Assume KKR lifts its offer to 0.70 euros a share, valuing Telecom Italia’s equity at around 15 billion euros and the company including debt at just over 37 billion euros. It could raise perhaps 9 billion euros of extra borrowing, while still keeping gearing at a reasonable 5 times 2021 EBITDA, or about 32 billion euros. KKR would still need to come up with nearly 6 billion euros of equity. That’s a lot, but not unprecedented, especially if other funds joined in. Advent and Cinven’s acquisition of Thyssenkrupp’s (TKAG.DE) elevator business, for example, involved an equity check of over 7 billion euros.

KKR would also have ways to quickly lower the debt. It could sell Telecom Italia’s stake in towers company Inwit (INWT.MI), which could raise at least 1.5 billion euros, or trim its 67% stake in its Brazilian arm, worth about 3.6 billion euros. KKR, which is investing through its infrastructure fund, may in the end opt not to use so much debt. Either way, the group does have some wiggle room to pay more.

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CONTEXT NEWS

- KKR is considering boosting its 10.8 billion euro offer for Telecom Italia to win over top investor Vivendi, Bloomberg reported on Nov. 23.

- The U.S. buyout firm has offered to pay 0.505 euros per share for the Italian telecom group, valuing it at about 33 billion euros including debt. If successful, it would be the largest private equity-backed buyout deal in Europe, according to Refinitiv data.

- Shares in Telecom Italia were up 9% at 0.4689 euros per share at 0957 GMT on Nov. 24.

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Editing by Neil Unmack, Karen Kwok and Oliver Taslic

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