A Turnaround Maestro's Greatest Test

Marco Tronchetti hatches a plan to revamp Telecom Italia

It was one day of takeover triumph followed by weeks of market-driven pain. Pirelli Chief Executive Marco Tronchetti Provera made the boldest move of his career on July 27 when he gained control of Italy's most valuable company, Telecom Italia, in a surprise $6.4 billion takeover of its parent, Olivetti. But almost immediately, a global rout in telecom stocks hit, making it look like Tronchetti vastly overpaid. In the wake of the September 11 terrorist attacks on the U.S., he was able to renegotiate the acquisition terms. But Olivetti's stock is still trading at less than half its price the day Tronchetti pounced. Jittery investors fretted that he lacked a coherent plan to restructure Telecom Italia, while local papers branded him a value-destroyer.

That was a bitter pill to swallow for a man who made a name for himself by turning around a near-bankrupt Pirelli in the 1990s. Tronchetti's reputation now hangs on a speedy overhaul of Europe's fourth-largest telco. So on Sept. 27, a week after antitrust authorities cleared the deal, Telecom Italia's new chairman sketched the broad outlines of his strategy to revamp the $30 billion carrier.

The plan calls for a $3.7 billion capital increase at Olivetti later this month through a combination of equity and convertible bond offerings. Tronchetti wants to hive off $6.6 billion in noncore assets within two years, including real estate holdings, satellite, TV, and information technology businesses. Those moves should help reduce the two companies' combined $39 billion debt and lower financing costs. "Within 24 months, the group will be strengthened in all aspects," he insists.

FIFTH ATTEMPT. Tronchetti, 53, may have signed on for the toughest job in Italy. Five years after it was privatized, Telecom Italia remains a sprawling bureaucracy. Four CEOs over five years have brought more instability than change. Should the global economy slip into recession, Tronchetti's efforts to pay down debt and sell off underperforming assets may be stymied. His predecessor, Roberto Colaninno, more than tripled Telecom Italia's debt, to $23.2 billion, partly by overpaying for a slew of acquisitions from Brazil to Turkey. Unloading some of them may prove difficult in the current climate. "This is not a market where you easily find buyers," says a top Telecom Italia manager.

A ferocious bear market also could scupper Tronchetti's plan to raise $4.5 billion in fresh capital. The money will be used to pay down part of Olivetti's $16 billion debt, the legacy of Colaninno's 1999 leveraged buyout of Telecom Italia. Servicing the debt absorbs 35% of the telco's cash flow and crimps investment.

Telecom Italia's new owner faces other challenges. As a former monopoly, the carrier boasts a considerable advantage over newcomers. Its share of the fixed-line market is still some 80%, and its wireless unit is the No. 1 player in one of Europe's hottest cell-phone markets. But growing competition, which slashed telephone tariffs by 29% over the past 12 months, is sure to eat into revenues and erode Telecom Italia's dominance.

PATRONAGE JOBS. At the same time, new broadband services have failed to meet growth targets by half, and service to business customers remains poor. The carrier's 110,000 workforce is still jam-packed with employees who owe their jobs to politicians in Rome. "I'm concerned about their ability to withstand competition," says Paolo Perrella, senior telecommunications analyst at Fortis Bank in Milan. Perrella predicts that net profit will plunge 40% this year, adjusted for extraordinary items and goodwill amortization.

While Tronchetti's room to maneuver will be limited by market conditions, many still believe he is one of the few managers in Italy who can pull off a turnaround of Telecom Italia. His timely bet on fiber optics in 1992 helped a low-tech cable and tiremaker build a leading-edge telecom components business. Tronchetti sold the fiber-optic unit to Corning Inc. last year for a hefty $3.1 billion. Indeed, despite nerve-rattling headlines, Tronchetti still commands great credibility among Italy's most powerful institutions, including the banks that financed his takeover of Olivetti. He'll need all the support he can get.

By Gail Edmondson in Milan

Before it's here, it's on the Bloomberg Terminal.