Telecom Italia to Create Controls on Eventual Brazilian Deals

Telecom Italia SpA will put in place controls for eventual deals involving its Brazilian assets amid calls by minority investors to prevent conflicts of interest with its top investor Telefonica SA.

Directors yesterday also decided to form a group to evaluate changes to the company’s corporate governance, according to a statement from the Milan-based carrier. Both the Brazilian and the bylaws issue will be discussed again Feb. 6, the company said. No negotiations are under way regarding Telecom Italia’s Brazilian unit Tim Participacoes SA, it said.

Italy’s biggest phone company said it will “define an ad hoc procedure, in line with that for operations with related parties,” to review any extraordinary transactions involving Telecom Italia assets in Brazil, according to the statement.

“Telecom Italia Chief Executive Officer Patuano learned a lesson at the December shareholders meeting and is trying to get maximum transparency and accountability if in the future any offer comes for Brazilian assets,” said Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University.

Marco Fossati, whose Findim Group SA is the company’s No. 3 investor, has cited conflicts of interest between Telefonica and Telecom Italia as a reason for his unsuccessful bid to dismiss the board in December.

Telefonica Fined

In December Telefonica CEO Cesar Alierta and a former executive Julio Linares stepped down from Telecom Italia’s board to avoid the perceived conflicts of interest in Brazil, where the two companies compete. The country’s antitrust authorities have fined Telefonica and ordered it to reduce its Brazilian holdings or convince Telecom Italia to sell its local unit, Tim Participacoes SA.

Telecom Italia’s board yesterday said it wouldn’t replace the directors since the panel’s term expires in April.

Fossati wants to reduce the influence of Telco SpA, the investment vehicle controlled by Telefonica, on the company’s board. He’s seeking to strip Telco’s power to name four-fifths of board members and prefers broader shareholder representation through a system that allocates seats based on the size of their stakes.

Telecom Italia Chief Executive Officer Marco Patuano supports the campaign by minority investors to have greater representation on the board, two people with knowledge of the matter have said.

Corporate Governance

Fossati, who owns about 5 percent of Telecom Italia, narrowly lost a bid at a Dec. 20 vote to revoke the current board led by Patuano, 49, a sign that some shareholders are getting impatient with corporate governance at Italy’s biggest carrier. The CEO, who replaced Franco Bernabe in October, faces another challenge in April when his mandate comes up for renewal along with the rest of the 11-member board.

“Reviewing governance is also a signal sent to Italy’s Prime Minister Enrico Letta that no special treatment will be guaranteed to Telefonica,” Carnevale Maffe said.

The “four-fifths” board rule has been in place since 1997, when Telecom Italia was privatized by the government.

Most recently, it has allowed Telco, whose main investors are Telefonica, Mediobanca SpA, Intesa Sanpaolo SpA and Assicurazioni Generali SpA, to control the board even with a 22.4 percent holding. Madrid-based Telefonica agreed in September to gradually boost its holding in Telco, giving the financial investors a chance to exit in the future.

Revive Business

Telecom Italia yesterday rose 1.2 percent to 84.3 euro cents, the highest level in 16 months, in Milan. The shares have risen 19 percent this month on speculation over a possible sale of the company’s Brazilian business.

The corporate governance issue is crucial now because Patuano faces key decisions, such as in Brazil, on how to reduce a $38 billion debt pile and revive its Italian phone business pummeled by Europe’s debt crisis.

“The fight over board composition is really a battle over what future Telecom Italia can have in the next 18 months, especially its role in Brazil,” Emeka Obiodu, an analyst at Ovum Ltd. in London, said in a telephone interview. “Whichever party comes out of this stronger will still face the daunting task of sorting out Telecom Italia’s finances.”

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