Italy's Telecom Italia At Crossroads After Losing Out On Takeover In Brazil

September 07, 2014

After losing out on a bid to take over control of Brazilian mobile phone operator GVT, experts say former Italian state telephone monopoly Telecom Italia is at a crossroads.

The path it takes, experts told Xinhua, will determine whether the company continues to be an international player in the fast-changing telecommunications market or more of a regional operator.

Telecom Italia, Italy's seventh largest company in terms of revenue, is the leading player in all parts of the Italian telecommunications market: fixed-line telephony, mobile devices, and Internet service. But the company's once-grand international ambitions have eroded predominantly to service in Argentina and Brazil. The investments in Argentina are likely to go the way of other non-Italian holdings, with a sale planned for Sept. 25.

But the company wanted to double down on its investments in Brazil, where Telecom Italia Mobile-Brasile is the second leading player in a vibrant four-company market. If it had succeeded in buying GVT from French mass media and telecommunications giant Vivendi it would have solidified its stake there.

Instead, Vivendi chose to sell GVT to Spain's Telefonica, which already owns Vivo, Brazil's largest mobile phone company, for 9.8 billion U.S. dollars (Telecom Italia had offered 9.2 billion U.S. dollars, plus a 20-percent stake in Telecom Italia itself). The Telefonica deal is still awaiting formal approval from Brazilian antitrust authorities. But it is already having a strong ripple effect.

Telefonica, which owns a little more than 8 percent of Telecom Italia's stock through a holding company, will jettison that holding. Banca Intesa Sanpaolo has also indicated it will sell its minority share in the company. Telecom Italia's shares sunk to 0.80 euro per share, their lowest level since March, on the news.

But the biggest impact may be that it leaves the company without a clear growth plan.

"Debt has been Telecom Italia's biggest problem for a long time," Raffaele Barberio, editor of Key4Biz, which follows Telecom Italia closely, told Xinhua, referring to the estimated 27 billion euros in red ink on Telecom Italia's balance sheets. "That makes any kind of expansion much more complex."

Barberio predicted Telecom Italia might eventually be forced to sell its Brazil unit --Oi, Brazil's smallest mobile phone company has already expressed interest -- a move that would allow it to take a big bite out of its debt. But it would also reduce the company to a regional European player and, perhaps, one day a target to be taken over by a larger rival.

But Franco Lombardi, president of Association of Small Shareholders for Telecom Italia, brushes aside that speculation, predicting the company will still grow its business in Brazil and use that cash flow to fuel growth elsewhere and pay own debt.

"Even without GVT, the Brazil subsidiary is in a very strong position," Lombardi said in an interview.

In the end, it may come down to the Italian government. According to retired Royal Bank of Scotland European telecommunications analyst Owen Gregory, the government could use its influence to bolster Telecom Italia's position or let the company fend for itself.

Additionally, with the government's so-called "golden share" -- which gives it veto power over major strategic moves -- the government could block a sale of the Brazil unit, or, indeed, a full or partial takeover of Telecom Italia itself.

Barberio agreed with Gregory's take on the role of the Italian government in Telecom Italia's future, but said that represents a problem.

"The Italian government hasn't had a real digital communications strategy since 2000," Barberio said. "With no strategy on that end and big debt on Telecom Italia's end, we have to say the options will be limited."

(Xinhua)



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