Telecom Italia CEO Exit Looms as Stock Loses $40 Billion

Telecom Italia SpA Chief Executive Officer Franco Bernabe told a parliamentary hearing last week that since 2007 he has helped the phone company shave $11 billion off its debt pile.

What he didn’t remind senators of: writedowns totaling $19 billion since 2011, or a 73 percent slump in the stock during his almost six-year tenure that erased 30 billion euros ($40 billion) in value. At 11 billion euros, Telecom Italia’s market capitalization is two-fifths of its net debt, which is on the brink of a cut to junk by Moody’s Investors Service.

A clash with Telecom Italia’s biggest investor group over strategy may turn out to be the last straw for Bernabe. The 65-year-old executive plans to tell the board at a meeting scheduled for Oct. 3 that he’s ready to step down after losing the backing of Telco SpA, the Telefonica SA-led holding company that owns 22.4 percent of the carrier, according to a person with knowledge of the matter, who asked not to be identified because the deliberations are confidential.

“Bernabe always knew that without the rebalancing of the capital structure of Telecom Italia there was no room for investments but only for asset disposals,” said Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University. “This is why he is putting on the table his resignation.”

Letta’s Government

A leadership change at Italy’s former state-owned phone company -- whose assets are considered strategic by the government -- would add to the country’s political turmoil. Prime Minister Enrico Letta said he’ll request a confidence vote for Oct. 2 to try save his five-month-old administration after Silvio Berlusconi, a partner in the ruling coalition, withdrew his support and pulled his ministers from the cabinet.

Poste Italiane SpA CEO Massimo Sarmi is the candidate favored by Telco as Bernabe’s replacement, people familiar with the matter said. Telco’s other investors are Assicurazioni Generali SpA, Intesa Sanpaolo SpA and Mediobanca SpA.

Telecom Italia may name independent director Jean-Paul Fitoussi or Chief Operating Officer Marco Patuano as interim chief, the person said.

Negotiations over Bernabe’s severance terms are under way, two people said during the weekend. Bernabe’s compensation totaled 2.97 million euros last year, data compiled by Bloomberg showed.

A Telecom Italia spokesman declined to comment, as did representatives for Telefonica, Intesa, Generali and Mediobanca.

Strategy Clash

Intesa, Italy’s second-biggest bank, late yesterday appointed Carlo Messina to replace its own CEO, Enrico Tommaso Cucchiani, who resigned after clashing with some shareholders.

Telecom Italia rose 5.2 percent to 61 cents in Milan. The stock has still lost 11 percent this year and is headed for its ninth consecutive annual decline. The carrier has cut its annual dividend since 2007 from as much as 14 cents a share to 2 cents as part of Bernabe’s strategy to offset falling domestic revenue and cut debt incurred before his arrival.

Bernabe has been considering a proposal to Telecom Italia’s board this week for a capital increase of as much as 6 billion euros, with a first tranche of at least 3 billion euros, people familiar with the matter have said.

Telefonica, which tightened its grip over Telecom Italia last week with a $1.2 billion deal to gradually buy out its partners’ stakes in Telco, is against a capital increase and prefers a sale of Latin American assets to reduce debt, people familiar with the matter have said.

Net Debt

Bernabe told the parliamentary hearing last week that disposing of businesses in Latin America would hurt Telecom Italia’s international profile.

Telecom Italia reported more than $38 billion in net debt at the end of June adjusted for some items. Moody’s said last month it may strip the company of its investment-grade rating, putting pressure on Bernabe to come up with measures to strengthen the carrier’s balance sheet.

Speaking yesterday on Rai 3 TV channel, 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.”

While Madrid-based Telefonica is against a stock sale, it may accept a smaller capital increase to help ease the tension with Telecom Italia, said one of the people.

Grid Spinoff

A resignation by Bernabe, who favors growing in Latin America after putting Telecom Italia’s Argentine business in order in 2010, would remove an obstacle to an eventual sale of the Brazilian division Tim Participacoes SA, which is the country’s second-largest wireless carrier with a market value of $11.1 billion.

Other proposals to raise cash and increase efficiency include a sale Telecom Italia’s mobile-phone towers, creating separate companies for its domestic consumer and business services, and a spinoff of the carrier’s fixed-line grid, people familiar with the matter have said.

“For a capital increase to work, it needed both a convincing business plan and stability and regulatory clarity,” Bocconi University’s Carnevale-Maffe said. “The first one can be written in a few days. The second, I suspect, is the real intangible capital that no one in Italy and in Europe has the authority to want to subscribe to.”

Price cuts forced by European regulators have hurt profit margins at carriers from Telecom Italia to Vodafone Group Plc. Since 2011, Telecom Italia has accumulated 14 billion euros in writedowns, including 2.2 billion euros for the first half.

Board Representation

Of the 14 Telecom Italia directors including Bernabe, 11 were proposed by Telco, according to the company’s website.

Bernabe’s legacy will include strengthening Telecom Italia’s Latin American units to offset a slump in business in its home market. In 2010, Telecom Italia boosted to majority its holding in the company that controlled Telecom Argentina with the purchase of an 8 percent stake from the Werthein family, resolving legal disputes with its local partner. In Brazil, Tim is winning market share against rivals including Telefonica and Carlos Slim’s America Movil SAB.

Best known in Italy for turning around oil company Eni SpA, overseeing its privatization and making it one of the world’s largest energy companies by market value, Bernabe 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 takeover by Roberto Colaninno’s Olivetti SpA 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 management could have done many more things to turn around the company over the past few years,” said Alberto Espelosin, who helps manage about 1.3 billion euros at Abante Asesores in Madrid, including Telecom Italia and Telefonica shares. “Bernabe’s legacy is reflected by the market, which is showing a disastrous performance of the shares. That is a very telling indicator of how unhappy investors are with him.”

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