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Italians' appetite for connectivity may ease Telecom Italia's woes


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Italians' appetite for connectivity may ease Telecom Italia's woes

Asrumors of a takeoverby French media giant Vivendi SA intensify, Telecom Italia SpA may be on the verge of a turnaroundas boosts to Italy's digitaleconomy come to the fore.

Analystsbelieve the incumbent operator, which on March 30 appointedFlavio Cattaneo CEO, is in a strong position to profit from pent-up demand forfiber and high-speed 4G mobile broadband services in the underserved Italianmarket. Last year the country ranked27th of the 28 EU member states for connectivity and network speed. Only 53% ofhouseholds — the lowest in the EU — have fixed broadband subscriptions.

Despitethe comparatively low levels of Internet connectivity, Italy is among the top 10EU performers for mobile broadband connections, with 75 subscriptions for every100 individuals. From powering the Internet of Things to enabling video-streamingservices, Italy's mobile network providers are fighting for their position inthe digital value chain.

"Fundamentally,telcos are in a good position for the future. There's never been such a greatdemand for connectivity as we move into the next digital age," Chris Lewis, founderand managing director of Lewis Insight,told SNL Kagan.

Theindustry's march toward the next digital age may present the opportunitiesTelecom Italia desperately needs. Embroiled in a string of management changes,laden with heavy debt and plagued with declining profits, the strugglingtelecoms group has battled against a poor market — exacerbated by a falteringeconomy — for the better part of a decade. Debt in the first nine months of2015 stood at a staggering €26.8 billion; a great deal more than TelecomItalia's market capitalization today.

At an investor presentation in London in February, TelecomItalia's outgoingCEO, Marco Patuano, presented an ambitious €12 billion planto invest in areas such as fiber, LTE, cloud and IP transformation. Whether those ambitiousplans will still go ahead remains to be seen, given Patuano's sudden departure.The company's biggest shareholder, Vivendi, is pushing for aggressive cuts ofaround €1 billion between 2016 and 2018; nearly double the €600 million Patuanowas planning to cut.

However, under Patuano's plans, Telecom Italia was on theright path to stabilizing its financial results, according to 451 Researchanalyst Declan Lonergan.

Lonergantold SNL Kagan that Telecom Italia was just starting to deliver improvedperformance metrics, such as better churn and retention rates, accompanied by aboost in its customer market share. Having said that, there is no short-term "silver bullet" to restore growth atthe operator, he added.

Despite facing serious cuts, Telecom Italia may benefit from signsof renewed commitment to the development of Italy's digital market and networkinfrastructure by the Italian government.

For instance, state-controlled power company Enel SpA revealedrecently that it is poised to enter the telecoms arena as a wholesaler when itannounced new proposals to spend €2.5 billion on rolling out ultra-broadbandinfrastructure across Italy.

Enel CEO Francesco Starace said the plan would be a "majorstep" toward achieving European Digital Agenda targets.

"Installing fiber cables through our electricity network,which reaches the businesses and homes of 32 million Italians, will enablewide-ranging coverage of the country at competitive costs, creating value forEnel and for all players that will want to use this new, importantinfrastructure," Starace said.

Lewis,however, pointed out that a number of factors will first need to be alignedbefore it becomes clear whether the government's latest efforts will benefitTelecom Italia.

"Youhave got this combination of huge demand that we all place on telecomsinfrastructure, which is only going to become greater with and the ," Lewis said,adding that "on the other hand, you have got the government's desire tohave a digital society and everyone connected. And then you've got theshareholders that want to generate value. And the question is, are those threethings in equilibrium at any time?"

Ifgrowing demand and improving macroeconomic conditions fail to spur the sleepingtelecom giant into action, a fast-consolidatingEuropean telecoms landscape could create the required pressure.

Thelong-discussed $24 billion merger of Wind and 3 Italia, the Italian mobilesubsidiaries of VimpelComLtd. and Hong Kong-based , respectively,is likely to force Telecom Italia and rival Vodafone Group Plc into action. The proposed combinationstands to create a national market leader by subscribers and would reduce thenumber of mobile network operators in Italy to three from four.

Thesubject of takeoverrumors itself, Telecom Italia could soon be under Vivendiownership. And with shareholders desperate for a turnaround in the company'sfortunes, such a deal may give it the scale and financial muscle it needs tocompete.