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Telecom Italia: Losing a Limb

Posted on: Tuesday, 12 September 2006, 12:00 CDT

Telecommunications companies all wish they had what Telecom Italia has: the much-coveted quadruple play, consisting of fixed-line and wireless phone service, television service, and broadband Internet access. So why is CEO Marco Tronchetti Provera about to give up a key piece of that winning combo?

Tronchetti Provera says he's spinning off Telecom Italia Mobile, the wireless business that was folded into the company amid much fanfare only two years ago. He blames the Italian regulatory authorities for making it difficult to run an integrated telecom company and says creating a new standalone wireless subsidiary would increase operating efficiency.

DAY OF RECKONING. Maybe so, but the move has many in the telecom industry scratching their heads. "This would represent a 180-degree turn in strategy," says Lars Godell, an analyst with Forrester Research. "And there's no industry logic to it. The only company in Italy that's strong in fixed-mobile convergence has decided to cut off one of its arms, in an industry where two arms are required."

Indeed, in other telecom markets, all the movement is toward mergers. France Telecom is combining with wireless operator Orange, and Deutsche Telekom is recombining with its T-Mobile unit.

So what's really gong on? Analysts speculate that Tronchetti Provera is now having to face the music after his 2001 buyout of Telecom Italia. The deal left the company so heavily leveraged that keeping its share price buoyant was fundamental to servicing and paying down debt. Instead, the share price has dropped by half as technological and regulatory changes have roiled the telecom market and spurred consolidation on a massive scale.

MAKING LIMONATA. Five years into Tronchetti Provera's telecom adventure, his company has close to 40 billion of debt on assets that have shrunk in value, key shareholders are bailing out and need to be reimbursed, and the CEO is looking desperately for fresh capital. His choices: either sell a minority or a controlling stake in the whole group, at a loss, or sell a profitable asset such as the wireless business, worth more than 30 billion. He appears to have opted for the latter.

But once Tronchetti Provera unloads the wireless company, he will still be faced with the urgent task of repositioning the company and sparking new interest in its faltering share price. Increasingly, it looks like media will be central to his strategy.

Noting that financial markets assign greater value to media companies than to telecommunications carriers, Tronchetti Provera is beginning to build his company around the idea of a media company that happens to own integrated telecommunications assets. He's even in talks with Rupert Murdoch's News Corp. "It's better to be seen as a tele-media group than a pure telecom player," says Emilio Pucci, a media analyst at e-Media Institute in London.

THE 30 BILLION QUESTION. To bolster the content side, Tronchetti Provera has held talks in recent days with Murdoch aboard the latter's yacht to nail down a commercial arrangement where Telecom Italia's platforms would transmit News Corp. (NWS) content. Telecom Italia has denied rumors the talks are also about an equity swap or sale, and in the conference call Tronchetti Provera confirmed that he had reached an agreement for 20th Century Fox films to be broadcast on Telecom Italia's Alice Home TV network.

Whether this strategy will pan out is still a very open question. Research indicates that consumers are far more willing to open their wallets for increased communication services than they are to spending a lot more on movies, TV shows, and music. "I can't think of any company that's expecting to make a lot of money on content," says Forrester's Godell.

If anyone is interested in snatching up Telecom Italia's wireless phone unit, they haven't said so yet -- at least not publicly. Several private equity firms, notably the Carlyle Group, where former Telecom Italia Mobile CEO Marco De Benedetti now works, are rumored to be interested, and large European operators such as France Telecom, have also been mentioned as possible buyers. For Tronchetti Provera, the sooner a buyer steps forward the better. Telecom Italia could really use an extra 30 billion.

Source: Business Week

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