The saga over who will end up the eventually owner of Telecom Italia SpA seems to have been resolved after the Spanish incumbent Telefonica SA confirmed it heads a consortium that will acquire a stake in the holding company of the troubled telecom Italian carrier.
Telefonica said at the weekend that it was part of a consortium that will become the largest shareholder in the Italian carrier with 23.6% of TI’s capital. This consortium is made up of Telefonica, the Italian banks Intesa Sanpaolo SpA and Mediobanca SpA, the insurance company Assicurazioni Generali SpA and the Benetton family.
The holding structure of the Italian carrier is highly complex, and this deal is no different. Since 2001, Telecom Italia has been controlled by the Italian tire company Pirelli, which controls 80% of the holding company Olimpia. The Benetton family holds the other 20% of Olimpia, which is a strategically important company because it has an 18% stake in TI and appoints the majority of its board.
Pirelli is controlled by former TI chairman, Marco Tronchetti Provera, who upset the Italian government last year when he proposed selling off the mobile arm as a way to reduce debt. Provera was forced to resign in September 2006 and since then he has been seeking a buyer for Pirelli’s 80% Olimpia stake.
In early April, the US telecoms goliath, in conjunction with America Movil, the largest mobile operator in Latin America controlled by Mexican billionaire Carlos Slim Helu, announced they were talking with Pirelli to acquire a third each of its 80% Olimpia stake.
But later in the month AT&T ended negotiations, saying it had decided not to pursue the matter further. Although AT&T did not say why it had withdrawn, the strong opposition in Italy from trade unions and even the Italian government to Telecom Italia falling into foreign hands, more than likely played a large part.
America Movil did not pull out however, and the news that the Telefonica consortium agreed late on Saturday to pay Pirelli 2.82 euros ($3.84) a share for the company, will come as a blow to Carlos Slim plans to expand in Brazil, where TI owns TIM Brazil.
The Telefonica consortium is paying 25% over TI’s market price, making Telefonica’s investment worth 2.3bn euros ($3.16bn). The other consortium members are contributing 900m euros ($1.23bn), making the total deal worth 3.3bn euros ($4.5bn).
The deal is complex, as the consortium has created a new company to buy out 100% of Olympia, which holds 18% of TI. This deal, in conjunction with a 5.6% direct holding in TI held by the consortium’s holding company, translates to a total 23.6% stake in the Italian carrier.
This holding company is 42.4% owned by Telefonica, 28.1% by Assicurazioni Generali, 10.7% each for Intesa and Mediobanca, and 8.2% by the Benetton family. Telefonica will be able to nominate two TI directors, while the Italian institutions will nominate 13 directors.
The fact that this holding company is majority owned (57.7%) by Italian financial institutions, although Telefonica is the single largest shareholder, will satisfy concerns of the Italian government and unions that the carrier will remain in Italian ownership.
This is not the first time that Telefonica has had talks with Pirelli about TI, but now it seems that the Spanish carrier is serious in its intention to boost its European profile, which began in November 2005 when it paid 17.7bn pounds ($31.3bn) to acquire the mobile operator O2 Plc, which gave it at a stroke, a significant market presence in the UK, Germany and Ireland.
Unfortunately, that acquisition of O2 meant that Telefonica’s overall net debt ballooned to over 50bn euros ($68bn), making Telefonica the most indebted carrier in Europe. In November last year Chairman Cesar Alierta pledged to not to make any significant takeovers until after 2007.
But Telefonica insists that the TI investment in no way alters Telefonica’s commitment to the markets with respect to limiting its financial investments this year to a net total of 1.5bn euros ($2.05bn).
This is commitment can be honored as Telefonica has sold its emergency communications provider, Airwave O2 Ltd, for a healthy $3.8bn in mid April. It has already said it wants to sell its 75% stake in Endemol NV, the media company that inflicted Big Brother on the world’s television screens.