Telecom Italia Takes Detour

By COLLEEN BARRY

MILAN, Italy – Telecom Italia took a detour from the road to convergence that most mobile and fixed-line operators have been treading, and wandered into a controversy that has spread from the market to the parliament.

Convergence has become the holy grail of the telecoms industry. Vodafone Group PLC and BT Group plan to bundle mobile phone and broadband service. Telecom France is working with Orange on merging web, television and mobile communication. And Vodafone Italia has teamed up with Fastweb to integrate fixed line and mobile phones.

Telecom Italia was on the same path – acquiring the 44 percent of the mobile phone operator TIM that it didn’t own just a year and a half ago and becoming the first to market with fixed line-mobile integration.

But the reorganization plan revealed Sept. 11 – with Telecom Italia announcing it planned to spin its mobile and fixed-line units into separate businesses to focus on content – was an unexpected change of strategy that appeared to signal the sale of TIM.

“The consensus way is convergence, and that is the way that Telecom Italia was going. That is why there is a bit of shock that it went the other way,” said Robert Grindle, an analyst at Dresdner Kleinwort.

The market initially welcomed the announcement, he said, because it saw a lot of hidden value in Telecom Italia that the change would bring out.

But the reorganization was quickly eclipsed by concerns that TIM could fall into foreign hands, raising the specter of government interference and putting Premier Romano Prodi on the defensive after he raised concerns about the plans.

Telecom Italia’s fortunes became further muddied by an unrelated wiretapping scandal that has implicated a former company security chief, but so far appears not to involve the company itself.

Within four days of announcing the restructuring, Chairman Marco Tronchetti Provera – who gained control of Telecom Italia SpA in 2001 through the Olimpia holding company – stepped down to “depersonalize” the spat.

The new chairman, Guido Rossi, has signaled that he intends to follow his predecessor’s plans. But many observers say that Telecom Italia’s long-term strategy remains unclear – and that alone justifies concern by investors, who have seen Telecom Italia stock lose half its value since 2001, and even the government.

“What I can surely say is that there is a lack of communication and the strategy was not really explicit,” said Francesco Sacco, a professor of corporate strategy at Milan’s Bocconi University. “It seems to be a situation where the company is being managed in the main interest of one of the shareholders, and not in the interest of global shareholders.”

Like the main incumbent telecommunication operators in Europe, Telecom Italia, which was completely privatized in 1997, has enjoyed a position of dominance in the Italian market – with 70 percent of the fixed-line business.

Among its peers, Telecom is the most heavily leveraged, Sacco said, mostly due to financial restructuring and acquisitions – including the 14 billion euros ($17.7 billion) it spent to buy the rest of TIM. That purchase left Telecom Italia with a debt of about 41 billion euros ($52 billion).

Still, the debt was manageable with its cash flow. The more pressing problem was the debt of the Olimpia holding company – owned by Tronchetti Provera and Bennetton – that controls Telecom with an 18 percent stake. The sale of TIM would result in dividends it needs to deal with its debt, analysts say.

“The necessity to make this decision now was not just based on considerations of the industry’s evolution, but the urgency was also based on the financial structure of Olimpia,” said analyst Carlo Alberto Carnevale Maffe, the president of Assodigitale, a think-tank on digital technology.

Some have questioned the strategy of pursuing media business – which in Italy is worth a total 6.8 billion euros ($8.6 billion) – at the possible expense of a national telecommunications market worth a total 36 billion euros ($45.6 billion).

But Maffe said pursuing content to develop a media business is a necessity in the changing landscape of the telecommunications market.

“If your revenues are voice you are going to be killed. You are going a zombie,” Maffe said, because fixed-line competitors such as Voice Over IP operator Skype and emerging mobile technologies are reducing the value of traditional services to near zero.

Telecom Italia’s own attempts at pursuing greater convergence were hampered by regulators concerned that it would use its dominant fixed line position to price out mobile competitors, Grindle said.

Grindle cautioned against assuming that Telecom Italia’s pursuit of a greater piece of the media pie signaled a move away from convergence.

“There are different kinds of convergence,” Grindle said. “Perhaps they feel there is more action on the media route. Maybe they are the leaders, maybe the trend will change.”