10/04/2007


Telecom Italia's sales and the future of national operators

 

The sector of telecommunications had some changes in year 90 with the privatization of state operators and the end of monopoly in the main countries of the World. Telecom's market of these countries continue being dominated by these privatized operators managed by international investors. This happened in Germany (Deutsche Telekom), Spain (Telefonica), France (France Telecom), Italy (Telecom Itália), Japan (NTT) and United Kingdom (BT).

 

The consolidation process wasn't strong enough to fight against national barriers and criate global operators, as an example of what happened in the market of networks suppliers (Vendors). Joint venture of Alcatel with Lucent and Nokia with Siemens are recent examples of a long process in this segment.

 

Just a few telecom groups get their revenue out of its native countries. Between them are Vodafone (84%) and Telefonica (62%). The big operators of United States AT&T, Verizon, Qwest and Sprint have few international participation.

 

 

The national part of these operators are supported most of the time by fixed telephony which has been affected by the competition established in cellular and broad band. Deutsche Telekom, for example, lost more than 2 million clients in 2006. This competition has affected the performance of operator's shares in the stock exchange market. To fight against it, the operators are internationalizing, especially cellular cause the revenue surpass fixed telephony.

 

In this situation, a possible sales of Pirelli's participation in Telecom Italia to AT&T and América Móvil can represent a consolidation process between the main european operators.

 

Why is Telecom Italia on sale?

 

Telecom Italia had some of joint venture restructures since it was privatized:

  • In 1997 Telecom Italia was privatized and had it control shared by several italian investors.
  • In 1999 Olivetti started to control the company with 52% of ordinary shares.
  • In 2001 Olimpia acquired 28.7% participation in Olivetti so the board of the company changed. Olimpia is controlled by Pirelli (80%).
  • In 2003 occurred the joint venture of Telecom Italia with Olivetti and in 2005 Tim was also incorporated to Telecom Italia. After joint venture restructure Olimpia has 18% of Telecom Italia shares and the rest 82% of shares.

 

Telecom Italia has a huge debt that increased from 27.4 billions euros in 1999 to 46.5 billions in 2005. The indebtedness obligated Telecom Italia to sale its operations out of the country, especially in Latin America and Greece. In 2006 the debt was 40.6 billion euros and the company is being pressured to undo business with Tim in Brazil, main active of Telecom Italia in other countries.

 

This situation and the competition promoted by cellular and broad band provoked a depreciation of Telecom Italia's shares in the Stock Exchange Market. When Pirelli, through Olimpia, acquired the control of Telecom Italia in 2001 the operators shares worth more than 4 euros. Nowadays the shares worth less than 3 euros. In 2006 Pirelli lost 1.17 billion euros related to it participation in Olimpia.

 

Who's gonna buy?

 

 

América Móvil, owned by Carlos Slim ( Claro in Brazil) and AT&T proposed to acquire the participation of Pirelli in Olimpia, controller of Telecom Italia. If this happens América Móvil, AT&T and Pirelli would have 1/3 of the actual participation of Pirelli in Olimpia.


The Italian Government is against this proposal cause can't keep the operator with italian investors so prefer europeans. Telefonica, France telecom and Deutsche Telecom must be interested.

 

Consequences to Brasil and Argentina

 

The acquisition of Telecom Italia's participation by América Móvil or Telefonica will have big competitive impact in Brazil and Argentina. Telefonica, América Móvil and Telecom Itália control the main cellular operators of these countries (more details). Telecom Italia and Telefonica also control the two main fixed telephony operators of Argentina.

 

Telecom Italia's situation is also an example of what could happen in Brazil with Telemar and Brasil Telecom. Both are regional operators with most part of the revenue (85.7% and 90.6%) coming from Fixed Telephony ( including broad band).

 

After the failure in the joint venture process that wasn't approved by shareholders, Telemar could be thinking in a joint venture with Brasil Telecom and creating a big national operator to compete with groups of Telefonica and América Móvil/Telmex. However, would be necessary a legislation change to allow this joint venture.

 

You could ask:

  • Who's gonna be the new controller of Telecom Italia? What are the consequences to Brazil?
  • Will telecom market continue being dominated by national operators? Or will the globalization process take to the consolidation of these operators in global groups?
  • Is there any place to a brazilian "player" in this game? What will be the future of Telemar and Brasil Telecom?
  • Will the price of VUM (interconnection) don't let the prices decrease?

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