IDC analysts Eric Owen and Roberto Mastropasqua assess the likely impact of the takeover of Telecom Italia by Pirelli and Edizione Holding (the Benetton family).
Telecom Italia has not had the most stable of periods – it has been involved in several failed strategic alliances over the last three or four years, culminating in the failed merger attempt with Deutsche Telekom in 1999. This led to a successful hostile takeover of Telecom Italia by Olivetti.
However, the cost of acquiring a controlling stake turned out to be too high and complicated, which has led to this further takeover by Pirelli and Benetton.
Telecom Italia would now appear to have the chance for a sounder economic base from which it can plan for the medium and long terms, and not be restricted by the need for short-term rewards. That is as long as the new regime can quickly restructure the company by reducing debt levels.
On July 29, it emerged that Pirelli, an Italian tire and cable company, together with the Benetton family had gained control of Telecom Italia through a complex deal.
The deal involves the purchasing by Pirelli and Edizione Holding, a holding company for the Benetton family, of a 23% stake in Olivetti from Bell, a Luxembourg-based holding company controlled by Roberto Colaninno, Chairman of Telecom Italia and CEO of Olivetti. Given that Pirelli and Edizione Holding already had approximately 4% of Olivetti’s shares, after the deal with Bell,
Pirelli and Edizione Holding now control approximately 27% of Olivetti, which in turn owns 54% of Telecom Italia. As a consequence, this acquisition gives Pirelli and Edizione Holding a controlling stake in the Italian PTT.
A new holding company will be formed which will be 60% owned by Pirelli and 20% by Edizione Holding, with the remaining stake likely to be shared between financial institutions – with Intesa Bci and Unicredito appearing as leading contenders. The purchase price was $6.1 billion which is 80% up on the previous Friday’s closing price for Olivetti stock.
Colaninno will resign as chairman of Telecom Italia and will be replaced by Marco Tronchetti Provera, current Pirelli chairman. Gilberto Benetton will become vice-chairman. Joint CEOs appointed by Pirelli will be Enrico Bondi (ex Montedison) and Carlo Buora (CFO at Pirelli).
The current regime at Telecom Italia came to prominence in 1999 when a consortium headed by Colaninno and Olivetti made and won with a hostile bid for Telecom Italia (54% ownership) following a highly controversial unsuccessful attempt by Deutsche Telekom to merge with Telecom Italia.
However, the regime has been dogged by problems caused mainly by Olivetti’s heavy debt burden. This contributed to the reduction in the amount of investment capital that Telecom Italia could dedicate to its network infrastructure, which has had a knock on effect on the deployment of advanced networking technology, where Italy now lags behind most West European countries. This position was further affected by the impact of the global economic slowdown on telecom stocks.
In late 2000, Colaninno attempted to move a highly profitable Telecom Italia stake in TIM into debt-burdened Tecnost, which led to a shareholder revolt. This eventually led to the merger of Tecnost with Olivetti that brought together a debt burden estimated to be $15.8 billion.
Also, the highly complex nature of Telecom Italia’s ownership structure meant that it would be always open to takeover, which in turn led to uncertainty about the company’s financial future.
This deal in itself is a little controversial as the Pirelli/Edizione Holding consortium has managed to gain control of Telecom Italia, which has an estimated market capitalization of $48.5 billion, for $6 billion. This was achieved by buying directly from Bell the stake it had in Olivetti at a price ($3.7) which is approximately double its current value on the Milan Stock Exchange.
Pirelli and Edizione Holding avoided a public bid, with the result that minority shareholders were excluded from the deal. Not surprisingly, some of the minority shareholders are unhappy with the prospect. However, one such shareholder that is happy would appear to be the Italian government, which holds 3.4% and has endorsed the deal.
The New Regime Pirelli and Edizione Holding are among the top Italian industrial groups - according to Mediobanca (Le Principali Societa Italiane, 2000), based on 1999 revenue, Pirelli Group and Edizione Holding ranked 7th and 13th respectively in Italy. Their size and market relevance is then comparable with that of Olivetti-Telecom Italia which was ranked third by Mediobanca.
Consequently, overall strategy can focus beyond the short-term approach adopted to date by Telecom Italia due to financial pressures.
From Pirelli’s perspective, most of the financing for the deal will come from the recent sale of its truck tire and energy cable businesses (expected to raise $1.7 billion over 18 months), announced on July 30, and the recent sale of its optical division to Corning for $3 billion.
As a result, the same level of debt as its predecessor will not burden the new regime. Also, significantly, is the fact that incoming Telecom Italia chairman, Tronchetti Provera, is considered to be much closer to the new Italian government led by Berlusconi than Colaninno is. As a consequence, the new regime at Telecom Italia is likely to get more cooperation from the government.
What Can be Expected?
Pirelli is considered to be both a new and old economy player. It is a major provider of telecommunications cabling, and has developed strong competencies in the areas of optical technologies. As a result, Pirelli has strong characteristics in the business of network implementations, as well as the development of new technology markets.
It is therefore expected that this influence will help Telecom Italia close the gap between itself and other European PTTs in the deployment of advanced services for both business and residential users in Italy.
Pirelli and Edizione Holding are multinational companies and are among the few Italian companies with a major international presence. This should bring an improvement in Telecom Italia’s international strategy, which is currently underdeveloped. There are also considerable synergies in the international activities of Telecom Italia and Pirelli (Latin America being the best example) which should lead to improvements in efficiency and approach to strategy, management, and so on.
The new regime has already made statements on the theme of reorganizing Telecom Italia’s financial base in order to relieve debt burden and increase investment capital. An obvious option would be to sell off “non-core” businesses. One such example would be the sell-off of broadcast TV business (La Sette), which is controlled by Seat and which competes with Mediaset and RAI, the Italian public broadcaster.
Impact on the Italian telecoms market
While significant changes will be likely at Telecom Italia over the coming months and year, these are unlikely to have a significant effect on an Italian market dominated by Telecom Italia. Telecom Italia leads all significant telecom markets and by some distance in the case of fixed network services, where it is estimated that Telecom Italia has approximately 78% market share (revenue).
Although Italy has complied with EU directives on opening the market to competition through the introduction of such facilities as local loop unbundling and carrier pre-selection (CPS), in reality very little has happened due primarily to commercial considerations.
Even the main competitors lag behind Telecom Italia in terms of market shares (Wind, Infostrada, Albacom, Tiscali), with the exception of Omnitel Vodafone which is a major challenger to Telecom Italia in the wireless market. TIM has approximately 49% of the Italian mobile market (revenue) with Omnitel not too far behind with 37%.
Two of the leading competitors, Wind and Infostrada, are currently implementing their merger, which will in itself impact the market, albeit in a relatively minor way at this time.
A potential threat comes from niche operators focused on markets such as broadband, data center services, metro-services and international voice and data services. Companies such as Colt, Atlanet and eBiscom-Fastweb are targeting such markets.
A recent report published by Italian telecoms regulator AGCOM suggested that competitors to Telecom Italia had up to 30% of the national long distance and international telephony market.
The big bang came with the 1999 takeover of Telecom Italia conducted by Colaninno. This introduced a dramatic breakthrough in the Italian Telecommunications scenario, and the Pirelli-Edizione Holding initiative can be considered the next phase of this evolution.
On the surface this appears to be a good deal for Telecom Italia. It should introduce an element of stability after a turbulent year of shareholder discontent. It will also enable the introduction of new financial resources to alleviate the debt problem. This, coupled with restructuring and sell off of non-core assets should enable Telecom Italia to invest in advanced services in Italy and refocus its international strategy.
For the first time in a few years, Telecom Italia can afford to look to the medium and long terms with its investments and be less focused on short-term paybacks.
For Pirelli and Edizione Holding, future success is perhaps a little less certain. Early indications would suggest that the 80% premium paid for Olivetti stock was a little on the high side in today’s climate. This will add to the pressure for change and signs of early success.
However, should the restructuring go well, we may see Telecom Italia appear strong in a European market where others are currently relatively weak and laden with 3G-license debt. This could lead to some interesting investment and partnership opportunities for Telecom Italia.