Telecom Italia Does the Splits

Telecom Italia (TIM) is to create separate, autonomous subsidiaries for its mobile business and its Italian fixed-access business, but the carrier says the move is not linked to any planned asset sales.

The carrier's shares were suspended from trading Monday while its board met to discuss the operator's strategy, with Italian and international media agencies reporting that a sale of Telecom Italia's mobile business was being planned. (See Telecom Italia to Revamp.)

But in a press conference held after 7 p.m. Central European time, the carrier's chairman, Marco Tronchetti Provera, announced that two new subsidiaries were to be created -- one for the carrier's Italian mobile business, the other for the fixed-access network in Italy. Each subsidiary will have its own board, management team, and balance sheets, he said.

The operator already has one separate subsidiary, TIM Brasil, which has more than 22 million GSM customers in Brazil.

Provera said the carrier decided to create the new subsidiaries following "a marked increase in regulatory pressure on Telecom Italia," especially in relation to the development and marketing of bundled fixed and mobile service packages. He said the creation of these separate entities would increase the transparency of Telecom Italia's operations, and give the company greater financial and operational flexibility, and that the company would now focus on the details of exactly which assets will be owned and managed by the new subsidiaries.

Also part of the carrier's new strategy is a greater focus on broadband and content services in Italy and elsewhere in Europe. Telecom Italia has broadband operations in France, Germany, and The Netherlands. (See DT Rival Launches IPTV and Italians Prep Big French DSL Rollout.)

But isn't this a radical shift in strategy, to spin off the mobile business that was only reintegrated into Telecom Italia in 2005? (See Telecom Italia/TIM Merger Approved.)

"Our strategy has to be consistent with reality," said the chairman. "The regulatory situation [has led the board] to introduce some changes. We strongly believe in convergence," but the carrier has to work within the constraints of the regulatory environment.

The chairman then faced a barrage of questions from financial analysts about whether the move would herald the sale of the mobile business, which had only been reintegrated into the carrier in 2005. (See Telecom Italia/TIM Merger Approved.)

And after deflecting many of them with answers such as "The only offers we know about are the ones we read in the newspapers," Provera stated: "We have no intention to sell -- we just want flexibility, both financial and operational. We have not received any offers. There is no mandate to sell anything, and there are no offers on the table."

But he left the door open for any bids. "We want to create value. It's up to the market. We will consider any offers we get. As in the past, we are open to all offers that would be of interest to the company. If there is an offer it is my duty to evaluate the offer."

Whatever the chairman says, the market's view is that the move is the first step towards the sale of the mobile business, a move that could wipe out the carrier's current €41.3 billion (US$52.5 billion) debt.

Ovum Ltd. analyst Martin Venzky-Stalling believes the move "has less to do with strategic considerations, addressing customer needs, or meeting regulatory requirements. The main reason seems to be the massive debt that has been accumulated and which is now becoming a real burden."

And selling the mobile business would not only be "a complete reversal of the company's strategy," it could also weaken the carrier, reckons the Ovum man. "BT Group plc (NYSE: BT; London: BTA) suffered from selling its mobile business, and many fixed-only players are trying to get back into mobile," he notes.

The general uncertainty over the carrier's future has not helped its valuation. Telecom Italia shares, which are back in play today, are trading down nearly 1 percent at €2.24 on the Italian bourse, giving the company a market valuation of €42 billion ($53.4 billion), only slightly higher than its net debt.

— Ray Le Maistre, International News Editor, Light Reading

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