Telecom Italia Upheaval Continues

What a weekend for the Italian incumbent as its chairman quits and it buys AOL Germany for $855M

September 18, 2006

4 Min Read
Telecom Italia Upheaval Continues

Never a dull moment at Telecom Italia (TIM) headquarters these days. Only days after announcing a surprise revamp of its business units and focus, the new strategy resulted in the chairman's resignation and a €675 million (US$855 million) acquisition.

New strategy causes resignations
Just last Monday, Marco Tronchetti Provera was explaining his company's decision to create two new subsidiaries, one for Telecom Italia's domestic access network and another for the carrier's Italian mobile business, otherwise known as Telecom Italia Mobile (TIM). (See Telecom Italia Does the Splits.)

But before he even considered his Saturday morning cappuccino, Provera had quit as the operator's chairman, in an attempt to remove "the Company from the tensions which have emerged" and enable the new strategy to be implemented. (See Telecom Italia Chairman Quits.)

Those tensions were mainly political, as the strategy upheaval was interpreted as the first step in the sale of TIM, a move opposed by many Italians, including the country's Prime Minister, Romano Prodi, who, according to Italian media reports, said he was "surprised and disconcerted" by the carrier's move.

A major concern is that TIM might be acquired by an overseas company. That's an issue because TIM is currently the only one of Italy's four mobile operators that is owned by an Italian company. The other three are: Vodafone Italy ; Wind Telecomunicazioni SpA , which is owned by Weather Investments, a company controlled by Egyptian entrepreneur Naguib Sawiris; and 3 Italia , owned by Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY).

Provera's resignation, and the appointment of Guido Rossi (who as chairman took Telecom Italia public in 1997) as his replacement, helped lift the carrier's share price slightly to €2.21 on the Milan exchange.

The carrier's chairman isn't the only person to have quit over the past week's developments. The Italian media announced this morning that Angelo Rovati, an advisor to Prime Minister Prodi, had resigned. Rovati reportedly recommended that the Italian state buy back part of the carrier.

AOL acquisition
One acquisition deal that is in motion, though, is Telecom Italia's purchase of AOL Inc. (NYSE: AOL)'s German ISP business. A €675 million ($855 million) cash deal was agreed upon over the weekend. (See T ItaIia Buys AOL Germany.)

That move, previously signaled by the operator, is in line with its new strategy of focusing on broadband and content services and strengthening its position across Europe. (See Telecom Italia Bids for AOL Units.)

Telecom Italia already has a broadband business in Germany, HanseNet Telekommunikation GmbH , which had about 750,000 broadband subscribers for its "Alice" broadband service at the end of June, and which earlier this year launched an IPTV service as part of its campaign to win market share. (See DT Rival Launches IPTV .)

The new deal will add a further 1.1 million broadband and 1.3 million dialup customers to that business, making Hansenet Germany's second largest broadband provider with nearly 1.9 million of Germany's 12 million DSL customers. The market leader is, of course, Deutsche Telekom AG (NYSE: DT)'s T-Online International AG , which has about 6.5 million broadband customers.

The acquisition, which values each broadband customer at about €613 ($776) is set to close within the next four to six months.

But Ovum Ltd. analyst Dan Bieler reckons Telecom Italia will have a tough job on its hands assimilating the new business. That's because, as part of the acquisition deal, for the next five years AOL will design, host, and manage subscriber services for all of Telecom Italia's residential Internet access customers in Germany and be responsible for all online advertising sales.

The acquisition, writes Bieler in a research note, "will be a real challenge," and he is not convinced that the portal deal with AOL is a good idea, as the existing Alice customers are used to a portal that acts as "a functional 'control panel,' " as opposed to the busy, service-intensive Web presence AOL favors.

Bieler believes Hansenet's simple online approach has been part of its attraction. "Whilst Hansenet must preserve the kind of service AOL Germany's customers are used to in order to control churn, the company should be carefully not to irritate Alice customers with an 'all singing, all dancing' portal," he writes.

— Ray Le Maistre, International News Editor, Light Reading

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