Vivendi Chairman Vincent Bollore has done the inevitable and used his clout as Telecom Italia's biggest shareholder to oust CEO Marco Patuano. Now comes the hard part.
If the famed corporate raider really wants long-term value, he'll have to drag Europe's most backward former state-owned telecoms operator into modernity. It won't be enough to slash staff costs, although Telecom Italia is certainly bloated. It made 261,665 euros ($295,000) in sales per employee last year, versus Deutsche Telekom's 305,959 euros and Telefonica's 375,075 euros.
The company requires massive investment in Italy. The ageing fixed-line network needs upgrading and it's years behind innovators like Deutsche Telekom on switching to cheaper Internet-based technology. Only 7.6 percent of its broadband customers are on fibre lines, compared with 19 percent at Orange and Deutsche Telekom's 35 percent.
The systems that manage everything from subscriptions to HR are outdated. Its hundreds of customer offers are a thicket of complexity, even after French price-slasher Iliad has shown the value of simplicity with just two mobile offers. A new three-year plan means Italian capex will rise to 12 billion euros between now and 2018, but that's a fraction of what's needed.
The former monopoly does have some advantages. There are no cable operators in Italy, so there's little fixed-line competition. Plus the Italian market is largely pre-paid so operators don't subsidize the cost of smartphones. That's allowed Telecom Italia to protect the Ebitda margin as earnings fall. But even that declined last year.
Some extra comfort may come if Italy's third and fourth-placed operators Hutchison and Wind are allowed to merge, which could ease price pressure.
But if Telecom Italia is to prosper it needs better networks, as well as an overhaul of its tariffs to emphasize data, a change its peers made years ago. It’s not a question of a new CEO but a complete revamp of how it operates, from infrastructure to a culture imbued with civil servant thinking.
It's hard to see how Bollore or his lieutenants will fix this. None are telecoms specialists. Instead they talk about how Telecom Italia and Vivendi can form a Southern European media powerhouse. Bollore is supposedly in talks with the Berlusconi family over ways the two companies can work with broadcaster Mediaset.
Such ambitions are beside the point. First, Telecom Italia has to get the basics right: providing good services that let it make a decent return on invested capital. Yet that could take five years of repair work.
Then there's the balance sheet. it has 29.95 billion euros in debt, and net debt is 4.4 times Ebitda, the highest among European peers after Spain's Telefonica. Some asset sales are in the works. But since Ebitda is falling, weighed down by Brazilian currency exposure, the metrics aren't improving. Macquarie thinks Telecom Italia needs a capital increase of about 5 billion euros even with the asset sales.
Investors hope Bollore will force Telecom Italia to sell its Brazilian mobile operator to reduce debt. That's possible on paper, but in the real world Brazil's in free-fall. The logical partner there is Brazil's Oi, which is restructuring its own $15 billion debt.
Ironically, one person who might be able to help is French billionaire Xavier Niel, who has disclosed options to buy up to 15 percent of Telecom Italia if he chooses. Niel's cheap-and-cheerful French brand Iliad was a leader in delivering television over phone lines, pioneered combined mobile-and-fixed offers and operates a lean structure with decent technology.
Billionaires don't tend to play nicely together, so don't hold your breath. Plus it isn't clear whether Bollore might just see Telecom Italia shares as a financial investment and seek to flip his holding at some point to potential suitors such as Orange or Deutsche Telekom. If he is in it for the long haul, though, pairing his investment acumen and political connections in Rome with Niel's telecoms prowess would be one way to sort out the mess.
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