Telefonica says Italy deal gives it leverage

PARIS Thu May 17, 2007 10:54am EDT

Peter Erskine, chairman and chief executive of Telefonica O2 Europe, attends the Reuters Global Technology, Media and Telecoms Summit in Paris May 17, 2007. REUTERS/Mal Langsdon (FRANCE)

Peter Erskine, chairman and chief executive of Telefonica O2 Europe, attends the Reuters Global Technology, Media and Telecoms Summit in Paris May 17, 2007.

Credit: Reuters/Mal Langsdon (FRANCE)

PARIS (Reuters) - Spain's Telefonica (TEF.MC) insisted on Thursday a deal with Telecom Italia (TLIT.MI) gave it the muscle to influence strategy in Europe and Latin America, despite having no executive power on the Italian group's board.

Peter Erskine, head of Telefonica's non-Spanish European operations, O2 Europe, argued that the agreement, which gives it a 10 percent indirect stake, was enough to allow Telefonica to steer strategy as Telecom Italia's only telecoms partner.

"We bought a chip to be at the table and it's now up to us how well we play that chip," he told the Reuters Global Technology, Media and Telecoms Summit in Paris. "We are part of a consortia ... and the banks are saying effectively, you are the industrial partner."

The Spanish company last month became the largest shareholder in Telco, a new holding company that will control Telecom Italia, after paying 2.31 billion euros ($3.14 billion) for a 42.3 percent stake.

This gives it a 10 percent indirect stake in Telecom Italia, but only two non-executive seats on the board.

Telefonica sources have argued that the deal places it in prime position for future European consolidation and stymies its biggest Latin American rival, Mexican tycoon Carlos Slim, a former Telecom Italia suitor.

Slim, who runs South America's largest mobile phone company America Movil (AMXL.MX), has been keen on a deal with Telecom Italia to boost his position in Brazil, South America's largest economy.

PREMIUM QUESTIONED

Nevertheless, some market watchers have questioned the premium of more than 20 percent that Telefonica is paying for an indirect stake in Telecom Italia, which gives it no influence over the management of the company.

Telefonica also paid about 11 percent more than its Italian partners -- 2.82 euros per share compared to the 2.53 euros paid by insurer Generali (GASI.MI), banks Mediobanca (MDBI.MI) and Intesa SanPaolo (ISP.MI) and the Benetton family.

It can, however, exchange its stake in the consortium for a direct stake in Telecom Italia if one of the partners backs out.

"The banks may or may not want to sell down in time, and obviously (what Telefonica does) depends on how it sees it going ... Telefonica see enormous benefits by being at the table, its a semi-pre-emptive (deal)," Erskine added.

He said that the deal was "clever" and denied that the agreement lacked bite.

"One can get clouded by the shenanigans of Telecom Italia," Erskine said, adding that should not detract from the fact that it is a sound company.

He said the deal had synergies, to which no size nor time frame could be put for the moment. They centered on procurement, roaming and new service development, he added.

"Telefonica is not there to be radical, we're there to play a long game, we will work with the management and if they are receptive, open-minded and credible they will find that there is no-one better to work with than Telefonica," he said.

Telefonica has no control over the naming of any new Italian partners but, in the case that the Italian firm sells any assets worth more than 4 billion euros, the company can exchange its stake in the holding for direct shares in Telecom Italia.

TIM Brasil is the only asset in Telecom Italia's portfolio that is valued above 4.0 billion euros.

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