Windfall for Telecom Italia

With Pirelli calling the shots, things get more interesting

With Olivetti selling a controlling 23% stake in itself to a consortium led by tire-maker Pirelli and clothing manufacturer Benetton for $6.1 billion, industry observers are questioning how much of the cash will flow to subsidiary Telecom Italia and where that cash will end up.

Although the time might be right for an opportunist to pluck a ripe U.S.-based carrier off the vine, expect Telecom Italia to spend whatever windfall comes its way on the home front, said Rudy Baca, vice president and global strategist for the Precursor Group.

“They need to upgrade their networks even though they have a very significant wireless network,” Baca said. “So they have to get their own house in order before they start looking at other properties.”

Baca claimed Telecom Italia has largely ignored its fixed infrastructure because of the success of its wireless unit, which has exploded mostly because the wireline side is in such disarray.

Telecom Italia refused to speculate on its plans for the influx of capital.

Because price pressures are virtually nonexistent in Italy due to minimal competition, Telecom Italia has been able to generate “tremendous profits” from its wireless system, which haven't been plowed back into the company, Baca said.

They still might not be. Telecom Italia and Olivetti, which owns a 55% stake in the carrier, will be under significant pressure to provide a return on the holding company's investment, said Susan Thomson, an analyst in Gartner Dataquest's London office.

“Pirelli will be looking to get some value out of the money it's put in because they paid quite a premium on the share price,” she said.

Thomson estimated the holding company paid 80% over the value of Olivetti's stock price at market close on July 27. Other sources indicated it paid nearly double the stock price. Nevertheless, Thomson said Olivetti and Telecom Italia have sizable debt loads, which created problems for the carrier that this deal solves.

“When Olivetti acquired them, Telecom Italia had to service the debt that Olivetti had,” she said. That debt wouldn't allow the carriers to issue any more paper because it would dilute Olivetti's shares.

In the first significant fallout from the deal, Telecom Italia Director and CEO (and largest shareholder) Roberto Colaninno resigned and was replaced by newly appointed board member Enrico Bondi.