* CEO Marco Patuano needs a Plan B
* Future of Brazil unit in doubt
* Bankers, investors say Tel Italia needs new strategy
By Leila Abboud, Pamela Barbaglia and Stephen Jewkes
PARIS/LONDON/MILAN, Aug 29 Telecom Italia has
lost a promising path to earnings growth by failing to secure
Brazilian broadband business GVT and may now turn from hunter to
hunted in a fast-consolidating telecoms industry.
Winning the auction for French media company Vivendi's GVT
was vital for both Telecom Italia and its rival,
Spain's Telefonica, as their European markets have been
shrinking. Italy was gripped by a mobile price war for much of
last year, revenue is falling and competition remains tough.
Telecom Italia lost out to Telefonica as it could not afford
to top its 7.45-billion-euro offer for GVT. Telecom Italia has
debts of 32 billion euros ($42 billion) according to Moody's,
and lost its investment-grade credit rating last year.
Buying GVT would have solved Telecom Italia's biggest
weakness in Brazil - the fact that its mobile business lacks the
broadband networks of its local rivals.
It may now consider exiting the country, where it makes a
third of its revenue, helping it pay some of its debts but
leaving it even more reliant on a sluggish domestic market.
Seven bankers and investors interviewed by Reuters on Friday
portrayed Telecom Italia as a company without a clear direction
that would struggle to raise fresh cash from shareholders to
fund important network improvements.
Chief Executive Marco Patuano "has a lot of egg on his
face", said one Milan-based senior banker. "He aggressively sold
(the GVT deal) as the answer to Telecom Italia's woes and now he
has to go back to the financial community and tell them what's
"There won't be a capital increase simply because it's going
to take some time for the company to recover from the setback
and come up with a new strategy - you can't ask for fresh equity
without a clear strategic plan."
Adding further confusion is Telecom Italia's changing
shareholder base. Telefonica is now its largest indirect
shareholder, with a 14.8 percent interest, but will sell part of
that stake to Vivendi as payment for GVT. Italian financial
institutions also want out of what has been a money-losing
investment since 2007.
Vivendi is likely to accept to take from Telefonica some 5.7
percent of Telecom Italia shares, or 8.3 percent of voting
rights, sources told Reuters. Analysts have speculated Vivendi
could later buy out the Italian investors too.
Some said Patuano's predicament made Telecom Italia a
potential takeover target for the likes of Deutsche Telekom
Niall Dineen, a portfolio manager at AGF International
Advisors and a shareholder in Telecom Italia and Telefonica,
said Telecom Italia was "no longer a consolidator" but had
become a "prey in the industry".
Telecom Italia and Telefonica compete in Brazil as owners of
number-two mobile carrier Tim Participacoes and
number one Vivo respectively.
A banker advising Telecom Italia said the Italians had
expected Vivendi to favour their GVT offer, despite Telefonica
putting in a higher bid, because of the prospect of content
partnerships and Vivendi's supposed interest in Italy.
A FUTURE IN BRAZIL?
Patuano's strategy unveiled last year called for asset
disposals in Argentina and elsewhere to help fund network
investments in Italy to boost broadband speeds and roll out 4G
mobile technology. He maintained that Telecom Italia's Brazilian
business TIM Brasil remained key to the group's future.
Patuano's devotion to Brazil may soon be tested. Grupo Oi,
Brazil's largest telecoms company, has signalled it is exploring
a bid to split TIM Brasil between itself, Mexico's America Movil
Telecom Italia said on Wednesday it knew nothing of the
approach for TIM Brasil, which has a market capitalisation of
$13.3 billion. After losing GVT on Thursday, the company said it
would stick to its strategic plan to develop Brazil.
However, analysts and bankers said Telecom Italia might
change its mind.
"Oi's recent announcement ... could represent an exit
strategy for Telecom Italia from Brazil, where it could be paid
a significant premium for its asset," said Espirito Santo.
Dineen at AGF said: "Its Brazilian business will be gobbled
up and it will probably get a good price for it."
It remains to be seen whether Oi, which is heavily indebted
itself after buying Portugal Telecom, will be able to pull off a
bid for TIM Brasil, several bankers said. A joint bid to break
up TIM's assets among the three local carriers could also run
into regulatory opposition, the people said.
A sale would help Telecom Italia to cut debt. Ratings agency
Fitch estimated on Friday that selling TIM Brasil could reduce
leverage on a net debt to EBITDA basis by 0.2-0.4 times. Telecom
Italia's leverage ratio, which was 2.9 times at the end of 2013,
is likely to increase this year due to falling profits and weak
free cash flow, Fitch said.
The banker working for Telecom Italia said Patuano "doesn't
want to sell Brazil, but there is no plan B right now".
He laid out three options for the group: sell to a larger
European peer such as Deutsche Telekom, pursue a tie-up in
Brazil, perhaps launching a capital hike to bid to buy Oi, or
pursue a telecom-to-media consolidation plan in Italy via a deal
with Silvio Berlusconi's Mediaset.
He added that he saw Telecom Italia's "best option" was to
look at a deal to partner with Oi in Brazil since it would make
sense to merge the biggest fixed-line operator with the
number-two mobile operator.
Another banker downplayed the chances of a foreign company
buying a more domestic-focused Telecom Italia because the poor
state of the Italian market would act as a "poison pill".
Carlos Winzer, credit analyst at Moody's, saw one silver
lining for Telecom Italia in the GVT loss, namely how it would
pave the way for Telefonica to part ways with Telecom Italia.
The value of Telefonica's shares in Telecom Italia have
plummeted by almost 70 percent since it entered in April 2007. A
consortium made up of Telefonica and four Italian firms acquired
a 23.6 percent stake in Telecom Italia for around 4.1 billion
euros, valuing Telecom Italia's shares at 2.82 euro per share.
The shares closed at 0.88 euro on Friday.
"At least Telecom Italia will truly be independent now from
Telefonica, ending the complicated relationship between the two
companies," said Winzer.
($1 = 0.7587 Euros)
(1 US dollar = 0.7609 euro)
(Additional reporting by Nishant Kumar and Anjuli Davies in
London, Robert Hertz in Madrid; writing by Keith Weir and Leila
Abboud; editing by Tom Pfeiffer)