Italian telecom giant Telecom Italia has been plunged into yet another crisis afterCEO Marco Patuano resignedfollowing a standoff with the telco's largest shareholder. Board member Flavio Cattaneotakesover as chief executive amid rumors that Vivendi SA may seize full control of the Italian operator.
Embroiled in a string of management changes, laden withheavy debt and plagued with declining profits, the struggling telecoms group hasbattled against a poor market — exacerbated by a faltering economy — for the betterpart of the last decade. Debt in the first nine months of 2015 stoodat a staggering €26.8 billion, a great deal more than Telecom Italia's market captoday.
Shareholdersare starting to become increasingly impatient so the company is under mounting pressureto reverse its underperformance compared with European peers such as 'sDeutsche Telekom and operator Telefónica.
Former Telecom Italia CEO Marco Patuano
As ChrisLewis, founder and managing director of Lewis Insight, put it: "Over the years,Telecom Italia seems to have stumbled — not from disaster to disaster — but certainly from a not-so-greatposition to another not-so-great position."
Withmuch at stake for its future, the Italian incumbent operator may have reached aninflection point in its 22-year history. Fresh rumors of an impending takeover ofTelecom Italia by Vivendi — prompted by Patuano's departure — are unlikely to go down well withthe Italian government, desperate to save what is left of the Italian operator.
A potentialVivendi push for greater control of Telecom Italia should not come as a surprise,given it recently raised its stake in the company to 24.9% from the 23.8%. Investors have repeatedlypointed out that this is just below the 25% threshold that would trigger a mandatorytakeover bid.
A takeover by the French content king would give TelecomItalia the strategic direction it so badly needs. For a start, Vivendi's strongambitions in the European market are no secret within the business community soexpectations aregrowing that Vivendi chairman Vincent Bollore may push Telecom Italia to slash costs,focus on southern Europe, and sell off its Brazilian unit.
Yet, despite the capital a Brazilian exit would free up,a number of industry observers cautioned against a speedy exit.
From an economic perspective, the Brazilian market is "ina bit of a hole at the moment," Lewis explained, adding that Telecom Italiashould "hold off for a while" before selling.
Barclays Capital analyst Mathieu Robilliard believes a turnaroundof the Italian assets is ongoing but may take time.
"In any case, [I] cannot see a fast exit from Brazil on attractiveterms," he noted.
Nevertheless,the financial gain of exiting Brazil would free up significant funding, according to 451Research analyst Declan Lonergan.
"Thinkof Telecom Italia as a vehicle [Vivendi] might use to embark on some kind of a consolidationeffort," he told SNL Kagan, explaining that TelecomItalia could play an important role for any company seeking to increase its WesternEuropean presence and could, more crucially, act as a gateway to the Mediterraneanregion. As such, Lonergan believes it may be an opportune time for Vivendi to movetoward majority control of the group.
Moreover,the proposed $24 billion mergerof the Italian mobile units of CKHutchison Holdings and VimpelComwould create a major rival for Telecom Italia that could spur action on both sides.
Lewis pointed out that the embattled Telecom Italia couldtherefore benefit from the scale that a deal with Vivendi would provide.
"Ultimately, we need scale in telecoms and if Vivendi bringsthat scale by takeover then all the better for the Italian market," Lewis explained,adding that the extra content muscle from Vivendi would help Telecom Italia bettercompete with Internet giants like Googleand Amazon for services.It may also be better positioned to take on OTT platforms and other online videoproviders.
Patuano had earlier denied that Vivendiwas urging him to offload the company's Brazilian unit. The former CEO maintainedthat the company's strategy for the next few years would involve €12 billion worthof fixed and mobile investments in Italy. Whether those plans willstill go ahead, remains to be seen. A source told Reuters that Vivendi is pushingfor aggressive cuts of around €1 billion between 2016 and 2018, nearly double the€600 million Patuano was planning to cut.
Both Telecom Italia and Vivendi were unavailable to comment.