Telecom Italia sticks to former chief’s strategy

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Investors in Telecom Italia’s shares will on Monday have the chance, via the Milan stock exchange, to pass judgement on the sudden resignation late on Friday of Marco Tronchetti Provera as chairman of Telecom Italia.

Uppermost in their minds will be the thought that the company has still not given a full explanation for the change of strategy it announced last week which led it into a deeply damaging dispute with the government of Romano Prodi.

Mr Tronchetti’s resignation, following the expressed shock of Mr Prodi at the strategy change and then embarrassing disclosures from the prime minister’s office of the details of conversations with Mr Tronchetti, significantly alters the picture in one respect, Milan business people said on Sunday. A company as important as TI had to act to restore its relationship with the Italian government.

However, TI has made it clear that under Guido Rossi, the new chairman, it still plans to pursue a radical strategy of splitting into three and its focus on broadband and media content. That could lead to the sale of its network infrastructure and mobile arms – moves which have roused intense government discontent.

Mr Rossi will probably therefore seek to explain why the company wants to make these moves. It was Mr Prodi’s office, and not TI, which revealed that the company had discussed potential deals with News Corporation, Time Warner and General Electric.

Mr Rossi has already sent an important signal that he means to follow the Tronchetti line, pushing ahead over the weekend with the €675m ($855m) purchase of broadband assets in Germany from AOL.

But the abandonment of the merging of the company’s fixed-line and mobile businesses still goes against industry trends. Only on Friday there was an agreement on combining product offerings between Vodafone, TI’s largest mobile competitor in Italy, and Fastweb, its largest broadband competitor.

People close to the company stress that no firm decision on the sale of assets has been taken. They say there is regulatory and government pressure to separate and possibly sell the network infrastructure. They say, too, that regulators have stifled – on competition grounds – efforts to create “revenue synergies”, that is, launching products that contain elements of fixed and mobile telephony.

Finally, these people say, there are considerable tax benefits from splitting and re-evaluating parts of the company before big rate increases come into force.

That the earlier plan to merge mobile and fixed-line has not worked so far can be seen in the company’s stubbornly low share price. That in turn has meant that investor allies, such as the Benetton family, have been pressing for a radical change of direction for some time.

TI has explained only some of that. If Mr Rossi, who is a respected troubleshooter and known for his independence, can go further, it might force others to side with the analyst at Westhall Capital who wrote last week: “The beginnings of a revolution are stirring in the telecoms world and its birthplace is Italy.”

Mr Rossi, who is also a noted corporate lawyer, will be valuable if the company runs into trouble with regulators such as Consob, the Italian financial services regulator, or the US’s Securities and Exchange Commission over disclosure of its plans.

Both TI and Rupert Murdoch’s News Corporation have insisted that they are interested only in discussing deals over the supply of programming.

Mr Prodi and, over the weekend, a member of TI’s board say there were also discussions over Mr Murdoch taking a stake in TI.

The company also hopes Mr Rossi’s presence will help with the government, saying that Mr Tronchetti’s resignation would “relieve [it] from the tensions that have emerged recently and prevent the unjust personalisation of events . . . from compromising the [company’s strategy]”.

Mr Rossi will want to demonstrate that he is indeed in charge. The board made clear that it still backs Mr Tronchetti and he remains by far the most influential company shareholder through a complex chain of highly-leveraged interests..

Tracing those interests starts at GPI, a holding company 60 per cent owned by Mr Tronchetti and family. GPI in turn owns just over 50 per cent of another holding company called Camfin. Camfin owns 25 per cent of Pirelli, the tyre company. Pirelli is by far the largest and dominant shareholder in Olimpia, another holding company whose only asset is its 18 per cent stake in Telecom Italia.

Mr Tronchetti used the chain to assert control over TI, a company he took over in 2001, taking on billions of euros in debt and paying far too much.

But he has so far stood down only at TI, remaining chairman of Olimpia, Pirelli, Camfin and GPI.

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