Global Economics

Telecom Italia Boss Abruptly Quits


In a dramatic turn of events, Telecom Italia Chairman Marco Tronchetti Provera resigned late on Sept. 15 amid a barrage of criticism over his plan to spin off and possibly sell the company's $16.5 billion mobile phone unit. The board appointed highly respected lawyer Guido Rossi to replace him—and to tackle the company's dual problems of a perennially sagging share price and mountainous debt.

Tronchetti Provera led a group of investors that acquired a 55% stake in Telecom Italia (TI) through a series of holding companies in 2001 for about €7 billion ($8.9 billion) and today controls the company with a 22% stake. But less than two years after folding Telecom Italia Mobile (TIM) into the parent company, he announced plans Sept. 11 to "demerge" and possibly sell it, mainly to work down the €41 billion in largely acquisition-related debt still hanging over the company (see BusinessWeek.com, 9/12/06, "Telecom Italia: Losing a Limb").

Minority shareholders rejected the industrial logic of breaking off the mobile phone unit at a time when other telcos are scrambling to integrate their fixed and mobile offerings. The move also provoked a political storm within Italy, with Prime Minister Romano Prodi publicly lashing out at Tronchetti Provera for not informing him in advance of the decision. Telecom Italia was fully privatized in the 1990s, but it operates in a sector considered of strategic national interest.

NEW BLOOD. A Telecom Italia statement said Tronchetti Provera's resignation was "motivated by the intention to safeguard the interests of the company and its shareholders in pursuing…the strategic direction chosen by the board." The release added that it had become impossible for the company to pursue its new strategy because of the "unjustified personal nature" of the conflict with the government and reiterated that there would not be a change of strategy with respect to the spin-offs of TIM and of the company's local loop fixed-line network infrastructure, also announced Sept. 11.

Thus, Rossi, a former Telecom Italia chairman who is often tapped for difficult restructuring jobs, was called in more as a mediator than as an executive chairman with a clean slate on strategy issues. (Recently, Rossi also was tapped to clean up the Italian soccer federation following a corruption scandal [see BusinessWeek.com, 5/10/06, "Unsportsmanlike Conduct in Italian Soccer?"]).

To lend a hand, Telecom Italia's board also promoted Carlo Buora, previously co-CEO, to a new role as executive vice-chairman, giving him the executive powers previously held by Tronchetti Provera. Rossi's powers will be limited to a general counsel role and "institutional relations," the company said. Rossi is considered to be close to the center-left politicians in government and an excellent mediator.

A GENTLEMAN'S AGREEMENT. Prior to the resignation, Prodi had spelled out in a public statement the content of secret meetings between himself and Tronchetti Provera on July 19 and Sept. 2, revealing market-sensitive information. Prodi said he had discussed an entirely different strategic plan for Telecom Italia with Tronchetti Provera, and thus the drastic decision to demerge TIM took the government by surprise.

According to Prodi, the two discussed instead a plan to sell Telecom Italia shares to Rupert Murdoch's News Corp. (NWS), in exchange for merging Sky Italia into Telecom Italia. Prodi said he had asked Tronchetti Provera to ensure that control of Telecom Italia remained in Italian hands.

In their second meeting, the prime minister said, Tronchetti Provera assured him that talks with Murdoch were proceeding favorably and that Telecom Italia's position was strengthened by professed interest in the company by General Electric (GE) and Time Warner (TWX)—on Sept. 17, Telecom Italia struck a deal with Time Warner to buy AOL Germany's Internet access business for €675 million ($852.7 million). Tronchetti Provera also reportedly told Prodi that Telecom Italia's Brazilian business could be sold for €7 billion to €9 billion to help reduce debt.

A DISCONNECT? During the month of August, Italian stock market authority Consob repeatedly asked Telecom Italia to respond to rumors of a deal with Sky or News Corp., but the company repeatedly denied that there were talks under way about anything other than a commercial deal for content distribution. On Sept. 11, Telecom Italia did announce a deal for 20th Century Fox films to be broadcast on Telecom Italia's Alice Home TV network. It is unclear whether Tronchetti Provera still intended, or intends, to widen that deal and sell an equity stake in Telecom Italia to Murdoch, but analysts now figure that Prodi's public disclosures would make it more difficult to negotiate any such deal.

A merger of Sky Italia with Telecom Italia's television interests would have created a larger competitor to state-owned RAI and Mediaset, the broadcasting group owned by former Prime Minister Silvio Berlusconi, though it's not certain whether Italian or EU antitrust regulations would have allowed the combination of the two.

An important piece of the puzzle is the Benetton family, of apparel fame, which owns 20% of the Pirelli holding company that controls Telecom Italia. The Benettons might be willing to increase their Telecom Italia investment in a scenario involving Murdoch, thus maintaining a higher concentration of Italian ownership—and appeasing the Prodi government.

CHANGE IN STRATEGY. But the family would have more cash to spend on Telecom Italia shares if the Prodi government were to unblock another deal. The Benettons are agitating for the proposed merger of Italian highway company Autostrade, in which they own a controlling interest, with Spain's Abertis. The Prodi government has blocked the deal, again citing the national interest in a strategic sector.

Meanwhile, Tronchetti's move to demerge TIM from Telecom Italia's fixed-line business and focus on broadband was criticized throughout the week by market commentators. With other telecommunications companies seeking to bundle their fixed and mobile service more tightly together, the decision was seen as a purely financial move aimed at reducing debt and lacking good strategic justification.

Analysts point out that Telecom Italia only recently spent approximately €100 million ($127 million) to integrate its fixed and wireless units, in keeping with a strategy announced amid much fanfare less than two years ago. Instead, experts say, Tronchetti Provera should have given the integration more time to pay off. But then, he was a man under pressure: Telecom Italia shares now trade at about half of what they were worth in 2001 when he took over the company. The current turmoil isn't going to fix that problem anytime soon.


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