Telecom Italia Lowers Sales Targets, Cuts 4,000 Jobs

Telecom Italia has cut its sales forecasts for the fifth time in three years and plans to cut 5% of its Italian workforce (around 4,000 jobs) and divest assets, in a bid to save two billion euro (US$2.53 billion) over the next three years. Italy’s largest phone company predicted 2009 revenue would be in line with 2008, lower than the 1% to 2% growth forecast earlier in the year. The debt-burdened incumbent announced it will shed assets worth up to three billion euro, although it has not confirmed where these divestments will take place.

Outlook and Implications

• Bracing for the Worst: Telecom Italia continues to struggle with overbearing debt, a stagnant home market and disappointing returns from overseas investments. Now, as the global economic slowdown begins to bite, the company has been forced to take further drastic measures in efforts to turn around its decline. Last month, after another disappointing quarter (see Italy: 10 November 2008: Telecom Italia's Q3 Profits Down 13%), the company was able to reiterate its 2008 targets—but only due to a cut its full-year revenue forecast in August to 30.4 billion (US$38.9 billion) euro, from 30.5 billion euro (see World: 11 August 2008: Telecom Italia Lowers 2008 Revenue Guidance), as a result of disappointing performances in Brazil and Germany. Telecom Italia CEO Franco Bernabe stated: "The conditions that have since emerged on the market and in the real economy mean that it is necessary to be even more incisive in our priority of debt reduction." The company is aiming to bring borrowings, which stood at 35.8 billion euro at the end of September 2008, to about 2.3 times earnings in 2011. The company said the ratio, which was about 3.1 at the end of 2007, will be about three at the end of this year.

• Redundancies Now Inevitable: Telecom Italia has targeted 40% of the two-billion-euro cost savings coming in 2009, meaning it now requires decisive and immediate action. The 4,000 job cuts come on top of a plan to eliminate 5,000 positions announced in June (see Italy: 5 June 2008: Telecom Italia to Cut 5000 Jobs by 2010) by 2010. It was hoped these job losses would largely be on a voluntary basis, mainly through early retirement or natural wastage—but the company is unlikely to be able to eliminate 9,000 jobs this way (from a workforce of around 80,000 employees), particularly as the global economic crisis worsens. The company now faces the prospect of widespread redundancies, employee discontent and possible industrial action from trade unions; however, the action shows just how desperate Telecom Italia is to make savings in order to remain viable.

• What Will be Sold? Although Telecom Italia has now specified where it plans to sell assets, it is believed that the company wishes to hold onto its core Italian and Brazilian interests. Therefore, its stake in Empresa de Telecomunicaciones de Cuba ETECSA, Cuba’s mobile operator, could be the first to go, while the company may consider selling its European broadband operations, in particular the German operator, Hansenet. The company denied plans to sell TIM Brasil, Brazil’s third-largest mobile operator this week (see Brazil: 1 December 2008: TIM Denies Buy-Out Rumours), and plans to hold onto its stake in the holding company which controls Telecom Argentina. Telecom Italia CEO Franco Bernabe stated: "Geographically, our growth will come from Italy and Brazil, without neglecting the Argentinean telecommunications market. Operations that fall outside these geographic and business priorities will be managed to enhance their value prior to divestment." However, the company's future plans are inevitably overshadowed by the continuing speculation concerning the buyout or break-up of the former incumbent in Italy (see Italy: 24 September 2008: Telecom Italia Denies M&A Plans). Although Telefónica and its partners own a controlling stake in Telecom Italia through holding company Telco, the Spanish giant has lost interest in full takeover following resistance from the Italian government. Telecom Italia is facing increasing pressure from both its domestic and European regulators, as the dominant status of the incumbent continues to slow development of the Italian telecoms market. IHS Global Insight believes that these pressures, coupled with its own financial woes, will force Telecom Italia to separate or spin off a significant part of its domestic business, as well as overseas assets, within the next 18 months.

• Investment Continues: Despite brutal cost-cutting, Telecom Italia forecast investments of around 4.8 billion euro next year, likely to go to Brazil, Argentina, and Italy's core markets. Indeed, the company has announced various long-term investments at home to bring its Italian networks up to date (see Italy: 26 November 2008: Telecom Italia Launches FTTH Trial Under AliceFibra Banner—Report and 31 October 2008: Nokia Siemens Networks to Upgrade Telecom Italia 3G Network). However, there has been significant speculation, not least from the Italian regulator, as to whether Telecom Italia can afford such rollouts (see Italy: 17 September 2008: Telecom Italia Requires Additional Finance for NGN). Although there is significant potential for both LTE and NGNs in Italy, the question remains of whether Telecom Italia, in its current form, is capable of meeting this.