Telecom Italia Aims to Exit Junk Status by 2016, CEO Says

Telecom Italia SpA, the phone company that lost its investment grade and chief executive officer last month, aims to restore its credit rating within three years by reviving the domestic business and cutting debt, new CEO Marco Patuano said in an interview.

“Telecom Italia can come back to an investment-grade rating within 2016,” Patuano said in his offices in Rome yesterday. “In Italy, we have not been able to stabilize our revenue yet, but we still have good cash generation.”

The 49-year-old inherits a company with $38 billion in net debt -- more than double its market value -- after predecessor Franco Bernabe failed to protect the carrier’s investment grade. Patuano said he’s accelerating efforts to restore finances. Telefonica SA, the biggest shareholder, agreed in September to gradually boost its stake in the holding company that owns 22.4 percent of Telecom Italia and controls its board.

“Before looking for a potential integration between the two companies, it is necessary to increase Telecom Italia’s financial, industrial and technological performances in the domestic market,” Patuano said. “That’s why we are focusing on stabilizing revenue and profits.”

Telecom Italia is studying partnerships with media companies to bolster its offerings, Patuano said in the hour-long interview with Bloomberg News.

Argentine Sale

This month, the CEO unveiled plans to dispose of assets including wireless towers, a broadcasting unit and a mandatory convertible bond. Telecom Italia also agreed to sell its Argentine business for $960 million. The towers are getting “a lot of interest” from Italian and international companies, the executive said.

Those measures, projected to bring a total of 4 billion euros ($5.4 billion) in proceeds, would ease pressure on the carrier to conduct a share sale previously under management consideration following Bernabe’s resignation on Oct. 3.

“In the next months, a capital increase is not an option for Telecom Italia,” Patuano said. “After our plan, we do not need a capital increase.”

Still, in a vote of no confidence, Standard & Poor’s last week downgraded Telecom Italia’s debt to junk, following Moody’s Investors Service to strip the company of its investment grade. S&P cited concerns that Telecom Italia may be unable to cut debt fast enough to offset declining earnings. Patuano confirmed Telecom Italia’s target to cut net debt to less than 27 billion euros by year-end.

Tough Goal

“Telecom Italia’s situation isn’t simple at all,” Andrea Giuricin, a professor who specializes in media and telecommunications at Milan Bicocca University, said in a phone interview. “Measures adopted by CEO Marco Patuano are a first step toward debt reduction, but it will be difficult for the company to exit junk status by 2016.”

Asset sales may help cut debt in the short term, though beyond that the company will need a capital increase, he said.

Hannes Wittig, an analyst at JPMorgan Chase & Co. in London, said it is risky to operate with a “stretched balance sheet in a market with well-capitalized competitors.” Management may be hoping for domestic consolidation, he said.

The stock rose 1 percent to 67.4 cents at 9:09 a.m. in Milan, valuing the company at 12.3 billion euros. It had gained about 5 percent since Bernabe’s departure through yesterday.

Discount Trading

“Telecom Italia shares are trading at a discount,” said Patuano, who met with unions yesterday to discuss the company’s three-year business plan. “And I cannot say I’ve done the work until they reach about one euro.”

Competition between Telefonica and Telecom Italia in Brazil is preventing Telefonica from seeking direct control in the Italian carrier immediately. Telefonica Brasil SA is the country’s biggest wireless operator under the Vivo brand, with a market value of $22 billion. Tim Participacoes SA, Telecom Italia’s local unit, is valued at $12 billion.

Calling Brazil a “strategic part” of Telecom Italia’s business, Patuano said the company plans to boost spending in the country to capture the next wave of telecommunications services linked to the mobile Internet.

“We do not need to sell Brazil in order to work on our financial structure since our debt is sustainable,” he said. “Of course, if an unsolicited big offer should come, we would be forced to evaluate it.”

Patuano is among the top European telecommunications, media and technology executives scheduled to attend a three-day investor conference organized by Morgan Stanley in Barcelona that starts today. Other speakers include Vodafone Group Plc CEO Vittorio Colao, Telefonica Chief Operating Officer Jose Maria Alvarez-Pallete, SAP AG co-CEO Jim Hagemann Snabe, Ericsson AB Chief Financial Officer Jan Frykhammar and Vivendi SA CFO Philippe Capron.

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