Board overhaul lets Telecom Italia CEO focus on strategy
MILAN, April 10
MILAN, April 10 (Reuters) - A board overhaul at Telecom Italia is set to placate belligerent minority investors, allowing Chief Executive Marco Patuano to focus on revamping the company's domestic business as the Italian economy begins to revive.
Yet questions remain over how he will handle a prospective sale of Telecom Italia's Brazilian assets.
Since his appointment in October, Patuano, who enjoys the backing of Spain's Telefonica and three other core investors, has faced a revolt by investors led by dissident shareholder Marco Fossati who are unhappy about the Spanish company's influence over Telecom Italia.
Reacting to the challenge, Telecom Italia's main investors agreed in March to put forward a majority of independent directors in a board renewal that is due on April 16.
Fossati has welcomed the change, while saying that minority shareholders still needed more representation.
Telefonica and the other core investors control Italy's biggest phone company via an investment vehicle called Telco.
Giuseppe Recchi, prospective chairman of the more independent board, told Reuters at the end of March he would not interfere with Patuano's strategy of selling assets to fund much-needed network upgrades and cut a heavy debt pile.
The improving Italian economy and speculation that Patuano will sell Telecom Italia's Brazilian assets have sent the company's shares soaring 50 percent in the last year, outperforming a broader rally by Italian stocks.
As the country emerges from its worst recession in 70 years, the end of a phone market price war could spell a turnaround in the fortunes of a company that gets two thirds of its revenue from Italy.
"It has never been the right call to buy Telecom Italia shares purely on valuation grounds," Berenberg analysts said. "This time, there are real prospects for an improvement in domestic operating momentum against a backdrop of changing competitor behaviour."
Berenberg upgraded the stock to "buy" on March 27 and set a target price of 1 euro, 13 percent above the current price.
Telecom Italia needs to invest heavily in network upgrades at home to capture growing demand for broadband and fight rivals such as cash-rich Vodafone, while still striving to cut its net debt of nearly three times core profit.
Patuano has around 2 billion euros of asset sales in the pipeline that could underpin his investment plans.
Despite the board reform, he will face challenges in representing the interests of all shareholders when dealing with Telecom Italia's Brazilian wireless unit TIM Brasil, which competes directly with Telefonica.
Telefonica is the largest investor in Telecom Italia, with an indirect stake of almost 15 percent, and has the option to increase its holding. The group would like to break up TIM Brasil and share its assets with other Brazilian telecom companies, sources close to Telefonica have said.
But Fossati, the dissident investor, has said Telecom Italia should keep TIM Brasil and seek a tie-up with Brazilian broadband operator GVT, owned by France's Vivendi.
"Telco has removed the conflict of interest," said Sergio Carbonara, founder of proxy adviser Frontis Governance, referring to the board candidates put forward by Telco.
"But there are still risks the board could be influenced given that Patuano, who is somehow the expression of the majority shareholder, has strong expertise and there is no-one who can really balance him in his role as company chief," he said.
Telefonica's involvement in Telecom Italia has landed it with a dilemma in Brazil, where the Spanish company controls the top mobile phone company Vivo.
Its parallel, indirect stake in TIM Brasil has caught Telefonica in the crosshairs of Brazil's competition watchdog, which has ordered it to scale back its presence in the country by mid-2015, according to sources familiar with the matter.
Patuano has said TIM Brasil, which has a market value of more than $12 billion, is not on the block. But he would consider a sale if he were to receive a "jumbo" offer.
A source familiar with the matter said Patuano will buy time on Brazil, allowing the Spanish group to push ahead with its strategy of trying to join up with partners such as Grupo Oi and Mexico's America Movil to make a possible joint offer for TIM Brasil towards the end of the year.
TIM Brasil's new owners would then break the company up, placating the Brazilian regulator.
But if Telefonica's Brazilian plans fail, it may have to consider selling its stake in Telecom Italia to satisfy the regulator.
"At one point, in the next six to 12 months, Telefonica will have to decide: either be a full partner or give up and say goodbye," a Telecom Italia investor said, asking not to be named. (Editing by Lisa Jucca and Tom Pfeiffer)
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