Uncertainty Trails Telecom Italia's Plan to Split Mobile and Fixed Units

The future of Italy's leading telecoms group, Telecom Italia, became unclear yesterday as the company's board approved a plan to reinvent the company as a media-focused player and spin off its mobile and fixed-line units. Although the company said it has not given any mandate nor received any offers for a sale of its assets, there is growing speculation that the company may be angling to sell off its Italian and Brazilian mobile operations to pay off its debilitating debt burden, which grew to 41.3 billion euro (US$52.5 billion) as of June 2006. Telecom Italia also disclosed the details of its recent parley with News Corp., confirming that it has signed a media content deal with News Corp.'s unit 20^th Century Fox to enrich the content on offer in Telecom Italia's "Alice Home TV" IP TV service.

Outlook and Implications

• A New Image: Barely two years after amassing debt in order to buy out minority shareholders at its Telecom Italia Mobile (TIM) unit, the company has taken the first tentative steps towards spinning off its mobile unit. But there is much more to its plans. At a time when the industry is consolidating and fixed-mobile convergence (FMC) is emerging as the trend for the future, Telecom Italia, which has been a key proponent of both concepts in the past two years, is about to dismantle itself and make its units vulnerable to takeovers from rivals. What began as a rumour that News Corp. wants to sell Sky Italia to Telecom Italia in return for a stake in the enlarged Telecom Italia group has escalated to an outright plan to overhaul the entire company. A company which has remained among the leading players in Europe's telecoms landscape, championing FMC and mobile TV, has suddenly opted to become a media-focused player, delivering content over the internet to customers via IP TV (see Italy: 31 May 2006: Telecom Italia Secures US$515 mil. Order for FMC Handsets, Launches HSDPA, Mobile TV and 28 April 2006: Telecom Italia, 3 Italia to Launch DVB-H Mobile TV in June).
• Dangerous Move: While Telecom Italia is not alone in its appetite for media content, other large European operators are doing the same, but without expressing willingness to sell any of the access infrastructures, whether mobile or fixed, that could become the preferred route to deliver content to customers in future. The only other incumbent in Western Europe without a mobile unit, BT, has found succour in its IT services division and has been able to offset partially the limitations of not having a mobile unit. Similarly, the only major mobile brand in Western Europe without a fixed unit, Vodafone, has begun frantic steps to gain a foothold in the fixed-line market to compete in the marketplace better. Telecom Italia has neither an established IT services business like BT nor a widespread global base like Vodafone. The allure of becoming a robust broadband provider across Europe is equally not guaranteed as most incumbents still dominate their respective home markets, leaving little room for an outsider to gain much influence. If Telecom Italia goes ahead and sells its mobile unit, the company would have shot itself in the leg and would inevitably confine itself to the status of a national champion (see Europe: 30 June 2006: Consolidation in Europe's Telecoms Industry).
• Socio-Political Issues Beckon: Exactly what, and how, Telecom Italia intends to achieve the splitting of its units remains unclear. The company has said that there is as yet no decision regarding the financial structure of the new companies to which it will transfer its mobile business and fixed-access network. But already a political storm is brewing, and following last year's leveraged buy-out of Wind by Weather Investment, the government of Prime Minister Romano Prodi is under intense pressure to block any move that could lead to the sale of Italy's last remaining domestically owned mobile operator. When the previous rumour of a deal with News Corp. surfaced, Italian ministers were quick to insist that the company's copper network was a national asset and should not fall into foreign hands. Although Prodi has said he is all for privatisation and would not block any sale, the threat of strike from employees of TIM and the divisions within the shaky ruling coalition are bound to trigger a political dimension to any possible sale (see Italy: 9 August 2006: Government Warns on Proposed Telecom Italia, News Corp. Deal).
• TIM Brasil Could Go: Unlike TIM Italy, Telecom Italia's Brazilian operation is relatively easier to dispose. Should that operation go on the auction block, there will be no lack of bidders. The country's second-largest operator (24.36% of subscribers at the end of June 2006) would likely solicit the interest of both Vivo, which is overlaying a GSM network to its existing CDMA platform (see Brazil: 29 August 2006: Vivo Selects Ericsson for GSM Network Roll-Out), and America Móvil-owned Claro. An acquisition by Vivo would allow it to reduce its GSM capex commitments, but a deal with either the Telefónica-Portugal Telecom-owned Vivo or Claro would be closely reviewed by regulators. A combined Vivo-TIM Brasil would control some 55.45% of the market and a combined Claro-TIM Brasil would control more than 47.0%. The GSM operators Oi, a unit of Telemar, and Brasil Telecom may also be interested in a sale, but a latter deal would be complicated by Telecom Italia's stake in Brasil Telecom (which it plans to sell). Oi and Brasil Telecom have 13.12% and 3.12% of the mobile market, respectively, and would gain far greater scale through a buy. Lastly, it is not impossible that an emerging-market specialist might target TIM Brasil: China Mobile's recent interest in Millicom shows that it has an eye on Latin America and even a Russian group could place a bid.