Telefonica SA (TEF) Chief Executive Officer Cesar Alierta pledged to avoid job cuts in Italy as the carrier boosts its influence in Telecom Italia SpA (TIT), according to two people familiar with the matter.
Alierta met Italian Prime Minister Enrico Letta today in Rome after gathering with Telecom Italia CEO Marco Patuano yesterday, said the people, asking not to be identified because the meetings are private. Telefonica, Telecom Italia’s biggest shareholder, agreed last month to gradually buy out co-investors in Telco SpA, the holding company that owns 22.4 percent of Telecom Italia and controls its board.
The Telefonica CEO confirmed the Spanish carrier’s commitment to invest in Telecom Italia’s fiber fixed-line grid and 4G mobile networks, promising also to maintain Telecom Italia employment levels, the people said.
The meetings in the last two days are crucial to deciding the strategy to be put to Telecom Italia’s board on Nov. 7. With its debt rating cut to junk by Moody’s Investors Service this month, Milan-based Telecom Italia is considering measures including a capital increase of as much as 2 billion euros ($2.8 billion), a cost-cut program, asset sales, as well as the scrapping of its dividends and a spinoff of its telephone network, people familiar with the matter said last week.
Letta today also requested guarantees to allow Telecom Italia’s rivals access to the carrier’s networks, said one of the people. Representatives for Letta’s administration and Telefonica declined to comment on the summit.
Franco Lombardi, the head of minority shareholder group Asati, said today in a letter addressed to Letta that “Alierta did not provide any guarantees about the potential sale of Tim Brasil.”
The Spanish executive refused to consider a making a full takeover bid for the rest of the Italian company at a price not lower than 1.1 euros a share or a merger via a stock swap, Lombardi said in the statement. Telefonica boosted its stake in Telco by acquiring stock from Telco investors at 1.09 euros each.
Telecom Italia rose 6.1 percent to 72 euro cents in Milan. The stock is up 5.3 percent this year after eight consecutive years of decline. The company has a market value of 13.1 billion euros, less than half of the adjusted net debt of 28.8 billion euros at the end of June.
For Letta, asking Telefonica to commit to keeping jobs comes as the country’s unemployment returned in August to 12.2 percent, the all-time high reached in May.
Speaking on Rai 3 TV channel Sept. 29, Letta said Telecom Italia, which employs more than 82,000 workers, needs a strong investor: “I have no objections to the investor being foreign and they can continue to trust Italy,” he said.
Telefonica had just tightened its grip over Telecom Italia days earlier with a $1.2 billion cash-and-stock transaction to buy out its partners in Telco over time. Other Telco investors are Assicurazioni Generali SpA (G), Intesa Sanpaolo SpA (ISP) and Mediobanca SpA. (MB)
Following that agreement, Italian labor leaders have said that Telefonica may eliminate jobs at Telecom Italia. Letta’s administration has signed a decree giving the state a say in any sale of the fixed-line network to a foreign buyer. Meanwhile, a senator in Letta’s Democratic Party wants to change Italy’s takeover law that would force a mandatory bid for a company when a buyer acquires effective control.
“There are still several loaded guns pointed to the Telecom Italia-Telefonica deal,” said Francesco Galietti, founder of Rome-based consultancy Policy Sonar that specializes in risk analysis. “The government has just categorized the network as a quasi-military asset, a move that gives it the power to veto a transfer in case of a EU-based buyer.”
During the negotiations that led to the Sept. 24 accord, Telefonica expressed it would back a Telecom Italia capital increase only if it comes with measures to shore up the Italian carrier’s finances, such as a disposal of its stake in Tim Participacoes SA (TIMP3) in the medium term, people familiar with the matter said at the time. They asked not to be identified because the deliberations were confidential.
Tim is scheduled to release third-quarter earnings after the market close today.
In the longer term, Alierta is in favor of a full merger with Telecom Italia as he sees Italy as a good market to expand its operations in Europe amid the current consolidation wave in the industry, people close to him said last month, declining to be identified because the discussions are private.
Robin Bienenstock, an analyst with Sanford C. Bernstein, wrote in a note last week that a capital increase in the appropriate context could pave the way for a full merger between Telefonica and Telecom Italia.
“Politically Telefonica cannot stand by and watch in the interim as TI fails to improve parlous Italian infrastructure,” she wrote in the Oct. 25 note. “Telefonica must guard against the risk that it will have to defend its stake against opportunistic feints by various shareholders and outside interests, with an offer for the whole company sooner than they hope.”