Investor revolt brewing at Telecom Italia over pay packages

MILAN, April 5 Fri Apr 5, 2013 1:33pm EDT

MILAN, April 5 (Reuters) - Telecom Italia may be heading for a showdown with frustrated shareholders over an executive pay package plan that risks being rejected at the annual meeting of the former telecom monopoly on April 17.

Telecom Italia's share price has tumbled close to all-time lows at 0.53 euros per share as Chairman Franco Bernabe struggles to resolve a strategic deadlock caused at least partly by the heavily indebted firm's ownership structure.

Several proxy advisory firms, including the influential ISS, have recommended a vote against the remuneration plan, advice likely to be followed by many foreign institutional investors, who hold about half of Telecom Italia's share capital.

"We would estimate more than 70 percent of the international shareholders to follow the recommendations and there is a risk that the remuneration report is not approved by shareholders," said Miguel Carrasco, managing director at Proxy Census.

The vote is non-binding, but a "no" vote by more than 50 percent of shareholders would be highly embarrassing to Bernabe. It would also test the feasibility of an alternative majority bloc to biggest shareholder Telco, which has a stake of 22.4 percent and which some analysts and investors blame for the group's unsatisfactory performance.

Telco is controlled by Spain's Telefonica, a competitor of Telecom Italia in its second biggest market Brazil, and a group of Italian financial institutions, who are reluctant to inject fresh cash into the company that could fund growth and reduce its large debts when they are struggling themselves.

Telco dominates the board which approved the pay plan.

"Telecom is in the middle of a cyclone," Franco Lombardi, head of retail investor group ASATI, which represents about 0.5 percent of the company's share capital and will vote against the pay policy.

The family business of Italian Marco Fossati, who has been openly critical of management, holds a 5 percent stake and the remaining shareholders have around two percent or lower.

Most have not indicated how they will vote on the pay package, which can still be modified.

BIG BONUSES, NO "CLAW-BACK" CLAUSES

The plan approved by the board proposes a 3 million euro pay package for Bernabe, a 20 percent cut from last year, and 1.3 million for COO Marco Patuano.

The problem ISS has cited is the high severance packages, which can be worth as much as 36 months of total pay, according to an ISS document seen by Reuters.

Frontis Governance and My Shares, a mobile app for retail investors, cited in their "no" recommendations excessive bonuses and the absence of "claw back" clauses, which would allow severance pay to be withheld if executives are deemed to have damaged the firm.

"A rejection would not be a surprise as there is no proportion between the remuneration and the performance of the company," said Arturo Albano, the head of Talete Corporate Governance Consulting who has worked on high-profile corporate governance cases in Italy.

Glass Lewis, another leading proxy advisor followed by international investors, has come out in support of the pay package vote but is critical of excessive severance payments. Taft-Hartley and SRI are against.

Telecom Italia posted a net loss of 1.6 billion euros due to goodwill writedowns in 2012 as margins fell in its home market in Italy, one of the worst hit in the euro zone crisis, and growth cooled in Brazil. It was forced to cut its dividend and turn to costly hybrid securities to fund upgrades of its ageing domestic copper network to meet demand for broadband services.

Speculation about possible consolidation of the telecoms sector has mounted in the last few days in Italy in what some said could divert attention from the annual meeting and the company's larger problems.

As if on cue, Telecom Italia said on Friday it had made contact with Hong Kong-based Hutchison Whampoa over a possible merger with its Italian unit.

"I don't think a move like this is a priority," said Roberto Lottici, asset manager at Banca Ifigest, referring to a possible deal with Hutchison.

"Eliminating a competitor to gain market share just shows they are not able to win new clients on their own, they're not aggressive. They should be focusing on broadband."

Several options to help Telecom Italia reduce its debt and resolve the strategic deadlock have been floated in recent months but foundered.

In December the board rejected a 3 billion euro cash offer from Egyptian tycoon Naguib Sawiris to buy a stake because the Telco faction did not want to see their ownership diluted.

Separate talks to sell a stake in the Italian fixed network, valued at between 12 and 15 billion euros, to a state-backed fund have stalled on price and governance grounds. (Additional reporting by Stephen Jewkes; Editing by Leila Abboud and Sonya Hepinstall)

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