Bernabe May Cling to Power at Telecom Italia on Dividends, Debt Reduction

Telecom Italia SpA (TIT) Chief Executive Officer Franco Bernabe, who presided over a 19.7 billion-euro ($27.3 billion) loss of market value, has boosted his chances of a second term by cutting debt and promising higher dividends.

Bernabe’s mandate ends April 12 when investors vote on whether to renew his contract for another three years. Executives at the Milan-based company’s biggest shareholder, Telco SpA, have made remarks supporting his management and the stock has gained 15 percent this year, trimming the drop since he took charge in December 2007 to 48 percent.

Growth in Latin America, where Bernabe has resolved disputes, and a 12 percent reduction in net debt have made up for concern over the 17 percent drop in the company’s domestic sales on his watch. Bernabe, 62, last month also promised an annual 15 percent dividend increase through 2013.

“I think he will be confirmed as he has done well in south America and in debt cutting,” said Emanuele Vizzini, who manages 560 million euros as chief investment officer of Investitori SGR in Milan and holds Telecom Italia shares. “He may be asked to be more aggressive on the growth side, which is still lacking.”

Bernabe’s term, and that of the board of Italy’s biggest phone company expire with the approval of 2010 accounts. Investors who jointly or separately hold at least 1 percent of the common stock can present board candidates by March 15.

Photographer: Giuseppe Aresu/Bloomberg

Franco Bernabe, chief executive officer of Telecom Italia SpA, speaks with reporters at the company's news conference in Milan, Italy on April 13, 2010. Close

Franco Bernabe, chief executive officer of Telecom Italia SpA, speaks with reporters at... Read More

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Photographer: Giuseppe Aresu/Bloomberg

Franco Bernabe, chief executive officer of Telecom Italia SpA, speaks with reporters at the company's news conference in Milan, Italy on April 13, 2010.

“Bernabe has done a good job,” said Franco Lombardi, president of Asati, a group representing about 2,700 investors holding a 0.53 percent stake. “He has shored up the company. The company now needs to start on a real growth path.”

Investor Support

Spain’s Telefonica and partners Mediobanca SpA (MB), Intesa Sanpaolo SpA (ISP) and Assicurazioni Generali SpA (G) own about 22.4 percent of Telecom Italia through Telco. They will determine Bernabe’s fate.

Intesa, Mediobanca and Generali declined to comment. Telefonica Chairman Cesar Alierta and Intesa CEO Corrado Passera have made comments supporting Bernabe. Alierta said Feb. 25 Telefonica will maintain its “present position” in Telecom Italia and is “very happy” with the management.

Passera praised Telecom Italia’s 2010 performance, with net income doubling to 3.12 billion euros. He said the results “contain lots of positive aspects” including lower debt and progress in South America after “difficult years.”

Bernabe may be named chairman with added responsibilities, leaving an internal candidate to take over as CEO, Italian daily il Messaggero reported this week, without citing anyone. The Telco shareholders declined to comment on the report. Last week, la Repubblica said Massimo Sarmi, CEO of Poste Italiane SpA, may replace Bernabe, without saying where it got the information.

Slashing Debt

Best known in Italy for turning around oil company Eni SpA (ENI), overseeing its privatization and making it one of the world’s largest oil companies by market value, Bernabe has had a previous stint at Telecom Italia.

He joined the company in November 1998 after about six years at Eni only to be ousted following Telecom Italia’s audacious takeover by Roberto Colaninno’s Olivetti in 1999. Bernabe returned to Telecom Italia in 2007 -- after he founded FB Group and merged it with Rothschild -- with a mandate to shrink the company’s ballooning debt.

Telecom Italia’s debt stood at 35.7 billion euros at the end of 2007 when Bernabe came on board. It fell to about 31.5 billion euros at the end of 2010.

“Despite tough economic conditions in Italy, Telecom Italia delivered on its most important 2010 target -- a more than 2 billion-euro net debt reduction,” Barclays Capital analyst Jonathan Dann wrote in a note. “We see cost cutting and Latam strength supporting further deleveraging in 2011.”

Latin America

In Latin America, Bernabe has worked on putting Telecom Italia’s house in order. The Italian company bought control of Telecom Argentina in October with the purchase of an 8 percent stake from the Werthein family. The accord allowed it to resolve all “outstanding legal proceedings” with its local partner.

Disputes with the Wertheins and the Argentine government’s attempt to force Telecom Italia to sell its stake amid tighter regulations had led the company to hire Credit Suisse Group AG in 2009 to analyze options, including the sale of its unit.

Its position in Brazil is even better, Sanford C. Bernstein & Co. analyst Robin Bienenstock wrote in a Feb. 18 note.

“Telecom Italia now owns what is probably the best wireless asset in Brazil,” she wrote. “It is an asset with long-term option value in terms of a sale price and one likely to generate near term cash.”

Home Market

At home, things have been less smooth for Bernabe. Like his counterparts at former phone monopolies such as Telefonica, Bernabe is struggling to revive growth in the company’s domestic market as a sluggish economy and rivals’ price cuts take their toll. Telecom Italia’s sales at home fell 7.4 percent to 20 billion euros last year, as mobile revenue dropped 11 percent.

Some analysts including Mediobanca’s Marco Greco say “the domestic stabilization is still too far.” Italian operations account for more than 70 percent of total revenue.

Telecom Italia “is a structural underweight in nearly all telecom portfolios,” said Saeed Baradar, Societe Generale SA’s telecommunications sales specialist. “A change in sentiment will see aggressive re-rating in the stock after five years of continual disappointment.”

While the dividend boost promise makes Telecom Italia more attractive to investors, the company “has one of the weakest organic growth profiles in the sector,” Tim Boddy, an analyst at Goldman Sachs Group Inc., wrote in a report to investors.

If Bernabe gets another shot at the top job, delivering on growth -- especially at home -- will be his biggest challenge.

To contact the reporter on this story: Chiara Remondini in Milan at cremondini@bloomberg.net; Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net

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