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Technology & Ideas

Elliott Has a Rocky Path to Telecom Italia Victory

The government’s rejection of a network spinoff favored by Vivendi doesn’t clear the way for Elliott to prevail with shareholders.

Elliott Has a Rocky Path to Telecom Italia Victory

The government’s rejection of a network spinoff favored by Vivendi doesn’t clear the way for Elliott to prevail with shareholders.

Could be a red herring.

Could be a red herring.

Photographer: Alessia Pierdomenico/Bloomberg
Could be a red herring.
Photographer: Alessia Pierdomenico/Bloomberg

Vivendi SA’s plans for Telecom Italia SpA haven’t quite been dealt a sucker punch by Italian regulators. But they — and billionaire Vincent Bollore, who controls the firm — certainly received a blow. The focus should now shift to the carrier’s underlying business, and it needs to do so soon. 

The communications regulator said the plan, proposed by then-CEO Amos Genish last year, to separate the landline network legally didn’t go far enough to justify giving the firm an easier ride when it comes to issues like pricing. But as much as Elliott Management Corp., the second biggest investor, jumped on the decision to advocate a further-reaching divestment, the activist still has a lot to do to convince shareholders its plan is sustainable.

Since it built up a shareholding in the carrier almost a year ago, Elliott has been pushing for the sale of a majority stake in the network, with the expectation that at least some of the proceeds are returned to shareholders. The American firm then succeeded in getting investors to elect a board controlled by directors it nominated, who in turn pushed out Genish in December in favor of former banker Luigi Gubitosi.

Regulator Agcom said that separating the network while retaining majority control would mean Telecom Italia would still have a “significant competitive advantage.” 

Team Elliott took that as ammunition — and quickly followed the announcement by declaring that Telecom Italia should separate the landline network without any further delay. The Italian state has already said it supports the hedge fund’s approach, which will combine the business with upstart rival Open Fiber SpA to create a single national network. But this would not be a panacea for all the company’s problems.

Investors can justifiably be concerned that forgoing a bidding war in favor of a single prospective partner doesn’t get them the best deal. There could be some cause for optimism that an alternative is possible: Altice Europe NV agreed to sell just under half of its French fiber network business to infrastructure investors for 1.8 billion euros ($2.1 billion) in November. While the Telecom Italia business is more complicated and unlikely to secure such generous terms, the deal shows that there are buyers for this type of asset. Whether the government would look so kindly on a different plan is another matter. 

Annus Horribilis

Telecom Italia Investors need clarity on when they'll see returns, and a divestment might take years

Source: Bloomberg

Ultimately the spinoff risks becoming a red herring. The board level fights have hurt the day-to-day business, as demonstrated by a weak set of fourth-quarter results and a 2019 outlook that fell short of analyst expectations. The focus now must turn to the operations.

During his tenure Genish was adamant that control of the network was key to Telecom Italia’s future prospects. At the shareholder meeting in March, Gubitosi will need to demonstrate he has the chops to make a success of the company without it. That should be the metric investors focus on when deciding to back the Elliott board or to revert to control by Vivendi.

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Alex Webb at awebb25@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net