Telecom Italia CEO Faces Tug of War With Bondholders

As Telecom Italia SpA Chief Executive Officer Marco Patuano tries to persuade his board today to sign off on a plan to trim the company’s $39 billion debt pile, he’ll be juggling the disparate wishes of bondholders and stakeholders.

Directors will discuss proposals including a sale of some wireless towers, issuance of securities to raise as much as 2 billion euros ($2.7 billion) and potentially disposing of Latin American assets, people familiar with the matter have said. It’s their first meeting since Chairman Franco Bernabe quit Oct. 3 after clashing with Telefonica SA, the company’s top shareholder.

A lot is riding on today’s assembly: Standard & Poor’s, due to complete its review of Telecom Italia’s rating this month, has said it may join Moody’s Investors Service in stripping the carrier of its investment grade. Analysts predict third-quarter sales fell about 9 percent to 6.64 billion euros, the lowest level in more than three years, as the domestic phone business slumped, according to data compiled by Bloomberg.

“A transfer of wealth from shareholders to bondholders is inevitable but there are few existing shareholders willing to foot the bill,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at FM Capital Partners in London. “The company has been procrastinating on major strategy reviews for a long time but the pressure is now clearly on a reshuffled management to take some hard decisions.”

Halting Spinoff

Telecom Italia’s 13-person board is scheduled to meet at the company’s Milan headquarters at 1 p.m. local time. Third-quarter earnings are scheduled for after market close.

Directors will also evaluate proposals including a new cost-cutting program, a possible cancellation of a dividend and the scrapping of a plan to spin off the company’s landline network, people with knowledge of the matter have said. They asked not to be identified because the deliberations are confidential.

The stock fell 2.6 percent to 73.3 cents at 10:11 a.m., valuing the company at 13.3 billion euros, less than half of its adjusted net debt. Net debt probably fell to 28.2 billion euros at the end of last quarter from 28.8 billion euros as of June 30, according to analyst estimates compiled by Bloomberg.

Telecom Argentina

Through yesterday, the shares had gained 19 percent since Bernabe’s resignation, while the cost of insuring its debt using credit default swaps dropped about 17 percent, on optimism that Patuano, a Telecom Italia veteran who was most recently chief operating officer, would jump-start the carrier with major asset sales.

Outside Italy, a potential disposal of the smaller Argentinian business will be discussed by the board today, people familiar with the matter said, asking not to be identified because the discussions are private. Telecom Argentina SA accounted for about 13 percent of Telecom Italia’s 2012 revenue.

Another proposal that will be debated is a sale of bonds that can be converted into Telecom Italia shares over time, a move that wouldn’t immediately dilute shareholder interest, people familiar with the matter said.

Brazil Future

While Telefonica is in principle not opposed to a small capital increase by Telecom Italia, the Spanish company favors selling Telecom Italia’s Brazilian division, Tim Participacoes SA, people familiar with the matter have said. Tim has a market value of $12 billion and Telecom Italia owns a 67 percent stake.

Representatives for Telecom Italia and Madrid-based Telefonica declined to comment on today’s board meeting.

“A sale of the Argentine asset is a small part of a bigger recovery picture that Telecom Italia needs to complete,” said Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University.

A disposal of the Brazilian holding is the “real key challenge” that Telecom Italia’s CEO will have to face next year, Carnevale Maffe said. “Patuano is aware that the sale could deprive the company of its fastest growing asset,” he said.

Marco Fossati, which owns about 5 percent of Telecom Italia shares, met with investors in London yesterday. In a presentation seen by Bloomberg News, he called for the setting up of an independent board and said a forced sale of Tim will not realize full value for the company.

Telefonica’s Playbook

Telefonica, which owns Brazil’s largest wireless carrier, in September increased its influence in Italy by agreeing to gradually buy out co-investors in Telco SpA, the vehicle that owns 22.4 percent of Telecom Italia and controls its board.

Assicurazioni Generali SpA, one of Telco’s investors, said today it will review Telecom Italia’s plan. CEO Mario Greco said on a conference call that the insurer will support the turnaround proposal if it’s “convincing.”

The plan to shore up Telecom Italia’s finances mirrors Telefonica’s own efforts to protect its debt ratings.

Last year, CEO Cesar Alierta sold assets including Telefonica’s call-center business and a stake in China Unicom (Hong Kong) Ltd. and halted dividend payments. It also introduced aggressive commercial offerings in Spain to reverse market share declines and prevent debt-ravaged consumers from switching to discounters such as Jazztel Plc.

The Spanish company, which continued with asset disposals this year and this week agreed to sell its controlling stake in the Czech Republic’s biggest telephone company for $3.4 billion, is betting on a recovery in Spain and Italy and growth in Germany.

(Updates with timing of board meeting, earnings release starting in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE