For many years Telecom Italia has been considering spinning off its fixed network. In August 2020, it finally announced the start of the legal separation of its copper and fibre network, which could also be the first step towards a merger with wholesale-only operator Open Fiber.
TIM is creating a company called FiberCop, which is not a simple network separation. It involves the participation of Fastweb, which will be a minority stakeholder, and of the private equity group KKR, thereby creating a complex structure of interdependencies.
While the new company will be legally separated, TIM will still maintain control and be able to appoint key executives. In this respect, it will not be a separation as strong as that of Openreach from BT in the UK, which has greater autonomy.
Both the spin-off, and the possible merger with Open Fiber, will be subject to regulatory approval. The merger with Open Fiber would require notification to the European Commission, although they could refer it to the Italian competition authority. Both authorities would likely raise concerns about the vertical integration of the merged entity.
TIM is finally following through with its intention to spin-off the fixed access network, but complexities remain
Telecom Italia (TIM) has repeatedly considered the spin-off of its fixed access network but has never followed through with its plans until recently. In August 2020, TIM finally announced it will create a company within the TIM group, called FiberCop. This new entity will include TIM’s passive secondary network from cabinets to homes (i.e. ducts, secondary network, sockets, etc. excluding cabinets). FiberCop will also comprise the Flash Fiber joint venture between TIM and Fastweb, through which the two companies are deploying FTTH in some areas of the country. As a result, TIM and Fastweb will both hold stakes in FiberCop (58% and 4.5%, respectively). Private equity firm KKR will hold the remaining 37.5%. TIM has set out an FTTH rollout plan for FiberCop, aiming to cover 56% of premises in Italy by 2025. In particular, by 2023 it would reach full coverage of ‘Black areas’ (i.e. the areas entirely left to private investment as part of Italy’s broadband strategy), and 75% of ‘Grey areas’ by 2025, for which public funding up to €1.1bn will be made available. The company commits to provide passive access on equal terms to TIM, Fastweb, and alternative operators.
The creation of FiberCop is therefore likely to be the first step towards the creation of a nationwide single fixed network in Italy. On the same day as the creation of FiberCop, TIM signed a letter of intent with the Cassa Depositi e Prestiti (CDP), which is the investment arm of the Ministry of Economy of the Italian Government and also holds a 50% stake in the wholesale-only operator Open Fiber (OF). By Q1 2021, both parties aim to form a company called AccessCo, comprising FiberCop and OF. However, this will require CDP to find an agreement with the energy provider Enel, which holds the remaining stake in OF.
Fibercop would be a less thorough form of legal separation compared to Openreach in the UK
According to TIM’s plan, the group will retain control of FiberCop. The new company will have a board of nine directors, five of which will be appointed by TIM. KKR and TIM will jointly appoint the chairman, while TIM will have the right to appoint the CEO and the CTO, and KKR will designate the CFO. TIM will also execute all operational activities for FiberCop (design, network construction, maintenance, and assurance), as well as corporate affairs, treasury, and procurement. This means that, while FiberCop is the result of a legal separation, it will differ from the separation of Openreach from BT in the UK. Openreach is now an entirely distinct company within the BT group, with an independent board of directors. Openreach appoints its CEO independently, and BT has the power to veto the appointment only on notification to Ofcom. Another difference is in the scope of the assets controlled by Openreach, which includes everything from the main distribution frame to the network termination point, including cabinets, whereas TIM will not transfer its cabinets to FiberCop. The size of the workforce of the two companies is also significantly different, with FiberCop set to have less than 100 employees compared to 32k of Openreach.
Should the merger with OF go ahead, the resulting AccessCo would still be controlled by TIM with a 50.1% stake. TIM is committing to guarantee the independence of AccessCo and its ‘third-party status’ through a shared governance mechanism with CDP, although the details of this mechanism are yet to be defined. The merger would create a wholesale monopoly in Italy, to some extent akin to the NBN in Australia – with the notable difference that the NBN is a wholesale-only operator, and cannot be vertically integrated with a retailer. The continued vertical integration of the separated network is likely to be the main concern of the regulators.
Competition authorities are likely to oppose the creation of a vertically integrated wholesale monopolist
Regulators have already started scrutinising TIM’s network spin-off. On 22 October 2020, the Italian communications regulator AGCOM announced that it will carry out an in-depth review of the spin-off proposal, for which it will seek input from stakeholders through a public consultation. The regulator has already carried out a similar exercise in 2019, when it reviewed the wholesale broadband access market taking into account the possibility that TIM would spin off its network. In March 2018, TIM submitted a plan to AGCOM for the creation of a legally separated entity (“NetCo”) which would control the primary and the secondary access network, including central offices and cabinets. In its review, AGCOM found that the plan did not change TIM’s status of operator with SMP, mainly because vertical integration would have continued to give TIM an advantage over its wholesale competitor OF. Since FiberCop will have a narrower perimeter compared to NetCo, and will remain vertically integrated with TIM, AGCOM could take a similar stance and continue to regulate FiberCop as an operator with SMP. The regulator will also have to assess FiberCop’s commitment to provide access to all operators on equal terms. TIM has not yet disclosed further details, although it is likely that FiberCop will retain the equivalence of inputs (EoI) model approved by AGCOM in 2016, with some adjustments (the separation plan of 2018 foresaw a similar solution).
The creation of FiberCop did not require notification to the EC, because the operation is not considered a concentration. On 30 November 2020, TIM confirmed that the EC did not see the need to open an investigation. Should FiberCop merge with OF, the deal will be reviewed by either the European Commission or the national competition authority, the AGCM. EU law requires the notification of a merger to the EC when the combined worldwide turnover of the companies exceeds €5bn, and the aggregated community-wide turnover of each entity is higher than €250m (unless each of the undertakings achieves more than two-thirds of its aggregate community-wide turnover within one and the same Member State). The AGCM could end up reviewing the merger instead of the EC if it so requests, and if the EC agrees that the merger only affects the Italian market. Both authorities are likely to be concerned about the combined effect of consolidation and vertical integration. The EC has already signalled that it would look at whether the merged entity will have specific ties vertically to some retailers – which would reverse two decades worth of gradual removal of regulation at the wholesale level. Similarly, the AGCM may not take a favourable position towards the operation. In a joint inquiry it conducted with AGCOM in 2014, looking at current and future competition in broadband access, the authority noted that vertical integration would be a less desirable outcome compared to a wholesale-only operator for the development of FTTH in the country, especially if the vertically integrated operator acquired other wholesale providers.
