Tim's Strategic Re-rating: Regulatory Clarity and Brazilian Growth Fuel Long-Term Potential

The telecom sector is undergoing a seismic shift in 2025, with consolidation and regulatory scrutiny shaping the landscape. For Telecom Italia (TIM), the confluence of regulatory developments in Brazil and robust financial performance from its TIM Brasil arm has positioned the company as a compelling long-term investment. Ahead of its Q2 earnings, investors should focus on two key drivers: the evolving regulatory environment in Brazil and the operational momentum of TIM Brasil, which together could catalyze a re-rating of the stock in a sector primed for strategic realignment.

Regulatory Scrutiny in Brazil: A Test of Strategic Resilience

TIM's network-sharing agreement with Telefônica Brasil, a cornerstone of its operations in the country, is under intense review by Brazil's competition authority (CADE). A proposed amendment to the agreement has raised concerns about the inclusion of “extra cities” and the potential for anticompetitive effects. While TIM and Telefônica argue the changes are technical, CADE has extended the review period by 90 days (totaling 330 days), signaling a cautious approach.

This regulatory delay, while seemingly a headwind, may ultimately strengthen TIM's position. A modified agreement that addresses CADE's concerns could solidify TIM's operational footprint without triggering regulatory pushback. The risk of a forced restructuring is low, as CADE's focus remains on preserving competition rather than dismantling the deal. The extended timeline also allows TIM to refine its strategy, ensuring the agreement aligns with both operational efficiency and regulatory expectations.

For context, Brazil's telecom market is highly competitive, with TIM, Telefônica, Claro, and Oi vying for dominance. A streamlined network-sharing deal could reduce costs and free up capital for innovation, particularly in 5G and fiber expansion. If approved, the agreement would mitigate regulatory uncertainty and provide clarity for investors, who have historically discounted telecom stocks due to sector-specific risks.

TIM Brasil's Financial Performance: A Model of Operational Excellence

TIM Brasil's Q1 2025 results underscore its role as a growth engine for the broader TIM Group. Total revenues hit €1.0 billion, a 4.9% year-on-year increase, driven by a 6.2% rise in mobile telephony service revenues. The post-paid segment, which now accounts for 49.6% of customers (up from 48.7% in Q4 2024), is a standout, with mobile ARPU rising 5.0% to 31.9 Brazilian reais. This shift toward higher-margin post-paid contracts is a strategic win, as it reflects TIM Brasil's ability to compete in a price-sensitive market while improving profitability.

EBITDA after lease grew 6.5% to €400 million, with a margin of 47.7%, outperforming many peers in the sector. TIM Brasil's organic EBITDA rose 6.8% to 3.071 billion reais, demonstrating resilience despite rising operating costs. While the fixed-line segment faces headwinds (Ultrafibre revenue declined 4.0% year-on-year), the mobile business more than offset this weakness.

The company's ability to maintain a high-margin profile in a consolidating sector is critical. As private equity firms and telecom giants increasingly prioritize infrastructure and data center investments, TIM Brasil's focus on mobile growth and cost discipline positions it as a prime candidate for strategic partnerships or M&A activity.

The Broader Sector: Consolidation and Strategic Flexibility

The telecom sector is witnessing a surge in M&A activity, driven by PE firms with over $300 billion in dry powder. Deals involving infrastructure assets, such as fiber optics and AI data centers, are reshaping the industry. TIM's strong balance sheet and Brazil-focused strategy make it an attractive participant in this trend.

For example, TIM Brasil's network-sharing agreement could serve as a template for similar partnerships in other markets, particularly in Latin America. The company's experience in Brazil—navigating regulatory complexity while driving operational efficiency—provides a replicable model. Additionally, TIM's potential to monetize noncore assets (e.g., through joint ventures or devcos) aligns with the sector's shift toward capital-light strategies.

Investment Implications: A Re-rating in the Making

TIM's stock has historically traded at a discount to its intrinsic value, reflecting sector-wide skepticism about margin sustainability and regulatory risks. However, the company's performance in Brazil and the broader industry's consolidation trend suggest this discount is unwarranted.

• Regulatory clarity in Brazil would remove a key overhang, unlocking value in TIM's largest market.
• Operational momentum in TIM Brasil, particularly in the post-paid segment, demonstrates the company's ability to adapt to market dynamics.
• Sector consolidation provides a tailwind for TIM to explore strategic partnerships or divestitures, enhancing shareholder value.

Investors should monitor the CADE review closely, but the extended timeline suggests a resolution is likely by late 2025. In the interim, TIM's strong EBITDA growth and disciplined capital allocation make it a defensive yet growth-oriented play in a sector on the cusp of transformation.

Conclusion: Positioning for a Re-rating

TIM is at a pivotal moment. The regulatory environment in Brazil, while complex, is manageable, and the company's operational performance in the region is a testament to its strategic agility. As the telecom sector consolidates and PE capital flows into infrastructure and AI-related assets, TIM's combination of asset quality, market leadership, and cost discipline positions it for a re-rating.

For long-term investors, the current valuation offers an attractive entry point. TIM's ability to navigate regulatory challenges, capitalize on Brazil's mobile growth, and align with sector-wide trends makes it a compelling choice ahead of Q2 earnings—and beyond.