Executive summary - Udo Bullmann

TELECOM ITALIA GROUP1. Company descriptionTelecom Italia is a business which operates in every sector of advanced communications. Its activities range fromfixed-line to mobile telephony, from the Internet to media. The group operates both in Italy and abroad, throughwell-known brands such as Telecom Italia, Alice, TIM, Olivetti, La7 and APCom.The Telecom Italia Group is a leading force in fixed-line and mobile telephony, the Internet, the media sector andoffice & systems solutions, and is currently investing heavily with the aim of expanding broadband and opening theway for a new generation of interactive and multimedia services, systems and advanced solutions for both familiesand the business world.Cabling, extensive network infrastructure and leading-edge technologies also underpin the Group's internationalpresence. In Europe, Telecom Italia is currently expanding broadband in France and Germany, and carries 60% of alltraffic between major Mediterranean basin countries. In South America, TIM Brasil has become the country's leadingnationwide GSM line provider, and is the country's number two carrier overall.Where turnover is concerned, revenue in the first nine months of 2006 was € 23 104 million, a 5.2% increasecompared with the first nine months of 2005.This very positive revenue picture is offset, however, by a high level of debt. The Group's net borrowings as at 30September 2006 were € 39 504 m, € 1 811 m less than the position as at 30 June 2006 (€ 41 315 m); this wasattributable to cash generation in the third quarter. Even given this substantial improvement, Telecom Italia stillcarries a mountain of debt. This is the result of a series of events which led to the explosive growth of a level of debtwhich was modest until 10 years ago. The reasons are to be found in a particularly turbulent decade in which therewere many changes both in the ownership structure and at the head of the Group.Chronologically, the most recent change goes back to September 2006, when Marco Tronchetti Provera, the thenChairman and leading shareholder in Telecom Italia, through Pirelli, resigned from the board of directors followingthe Government's outright rejection of his reorganisation plan. He handed over to the lawyer, Guido Rossi, whoreturned to head Telecom Italia, as he had for a few months in 1997.But what are the reasons for the explosion in the Group's indebtedness? To understand this, we need to go back to thetime when the business, having been a public undertaking, moved into private ownership.2. Economic and social effects2.1 Description of LBO (offshore base, activity focus, etc.)It was in 1997, during the Prodi Government, that the need arose to privatise Telecom Italia, a State-owned giantwhich at that time boasted a turnover equivalent to more than € 22 million, a workforce of 124 000 and holdings invarious companies throughout the world, and was the first mobile telephony operator in Italy and the country's firstInternet service provider. It was no easy matter to privatise such a huge group, but the Treasury Minister and theMinister of Industry, in conjunction with the Minister of Telecommunications, had a specific political idea, namelythat Telecom Italia would become the first Italian public company to bring together small savers and the capitalmarket, which at that point was under-developed by comparison with its European partners. There were two types ofownership structure which could be used as a basis: the Anglo-Saxon public company and the typically French 'hardcore' structure. While the first would ensure widespread share ownership with good protection for minorityshareholders, it would also have made the Telecom Italia Group excessively vulnerable, exposing it to acquisitionsby foreign companies (something that the Government did not welcome in such a strategic sector). The publiccompany model also had many negative aspects with regard to corporate governance, such as the agency costsassociated with the marked separation between ownership and control, which could lead to opportunistic behaviouron the part of management. Adoption of the 'hard core' structure, on the other hand, would undoubtedly have broughtabout greater involvement of a stable shareholder base in the company's performance, but would have run counter tothe principle underlying privatisation itself.Although the privatisation of Telecom Italia was adjudged a success from the purely technical point of view, giventhe large number of savers who bought into it, the same cannot be said about the choice of ownership structure.Negative signs of instability, unmanageability, and the lack of a leading shareholder with experience of the industrywho would pursue a clear, agreed goal all emerged in short order.