Telecom Italia: Gone Courting
After a day of corporate strategy sessions between financial analysts and Telecom Italia's management in Florence's dazzling Palazzo Vecchio, a harlequin performed 16th century antics. But Chief Executive Roberto Colaninno had already stolen the show. Several hours earlier during the Feb. 6 meeting, he did some financial acrobatics of his own, unveiling a complex share conversion and buyback scheme that many believe is the prelude to a strategic alliance or merger for Italy's former phone monopoly. "They are saying, `We are open to new partnerships in Europe,"' says Peter Wirtz, telecom analyst for investment bank WestLB Panmure in Dusseldorf.
Telecom Italia has had little freedom to maneuver in the communications mating dance because of its complicated ownership structure. It is controlled by the heavily indebted holding company Olivetti, which Colaninno used as a vehicle to take control of Telecom Italia 18 months ago in one of Europe's first big hostile takeovers. Now, Colaninno wants holders of Telecom Italia nonvoting shares to pay a high premium for the right to convert their equity to stock with voting rights, which trade at a higher price. If approved, this scheme would raise enough cash to bankroll a big buyback of Telecom Italia stock and cut Olivetti's debt by a third. The buyback would reduce Olivetti's stake in Telecom Italia from 54.8% to about 40%, and Telecom Italia would gain more leeway for dealmaking.
High on the list of potential partners are German giant Deutsche Telekom, which lost its 1999 bid for Telecom Italia; Dutch operator KPN; and French mobile operator Bouygues Telecom, in which Telecom Italia already has a 10% stake. A Jan. 30 deal between the mobile units of Telecom Italia and Deutsche Telekom to cut the prices on mobile-phone calls made while "roaming" outside the country of residence could be the first move in a merger or a broader strategic alliance. "Put the two together and you've got something capable of challenging Vodafone," says John Tysoe, head of telecom research at WestLB Panmure in London. Deutsche Telekom says there are no talks at present, but it's not walking away either. "If I look at the footprint that Telecom Italia Mobile has and the footprint we have it's quite nice," says Jeffrey Hedberg, Deutsche Telekom management board member in charge of international operations. "It's obviously an opportunity we continue to monitor." Colaninno firmly denies that he is contemplating a merger with Deutsche Telekom.
JUST A TRIM. To his credit, the 57-year-old Colaninno has sold noncore assets, trimmed 10,000 jobs, and reaped $2.5 billion in cost savings. Last year, the company invested $1.56 billion to upgrade its fixed-line network. It has also expanded its hot cellular business, Telecom Italia Mobile (TIM), whose profits jumped 19% in 2000. Its Internet and Yellow Pages unit, Seat Pagine Gialle, boasts the most popular portal in Italy.
But the grooming has only just begun. The Rome-based giant lags behind its European rivals in overhauling its fixed-line operations, which still account for 62% of Telecom Italia's $27.1 billion estimated sales in 2000. Profits rose 8%, to $2.4 billion last year. Regulators have protected the Italian market from competition, so Telecom Italia still retains 89% of the total market. Yet Colaninno's forecasts for 15% growth could be zapped as the final bits of legislation open up competition in Italy at the local level. Competition in broadband services is heating up, too.
Colaninno has had one bit of luck: Telecom Italia's debt was so huge that he had to steer clear of the most expensive third-generation cellular license auctions, which have now saddled the competition with debts as big as his own. That twist of fate may well give Colaninno the chance to continue polishing Telecom Italia's act and be more selective in choosing a suitor. If, however, Telecom Italia shareholders prove hostile to his plans, he may be forced to forge an alliance with the first bidder that comes along. One way or another, Telecom Italia won't be sitting on the sidelines much longer.