Telecom Italia Convergence Is Derailed

The Associated Press
Sunday, October 1, 2006; 9:46 PM

MILAN, Italy -- Telecom Italia took a detour from the road to convergence that most mobile and fixed-line operators have been treading, and wandered into a controversy that has spread from the market to the parliament.

Convergence has become the holy grail of the telecoms industry. Vodafone Group PLC and BT Group plan to bundle mobile phone and broadband service. Telecom France is working with Orange on merging web, television and mobile communication. And Vodafone Italia has teamed up with Fastweb to integrate fixed line and mobile phones.

Telecom Italia was on the same path _ acquiring the 44 percent of the mobile phone operator TIM that it didn't own just a year and a half ago and becoming the first to market with fixed line-mobile integration.

But the reorganization plan revealed Sept. 11 _ with Telecom Italia announcing it planned to spin its mobile and fixed-line units into separate businesses to focus on content _ was an unexpected change of strategy that appeared to signal the sale of TIM.

"The consensus way is convergence, and that is the way that Telecom Italia was going. That is why there is a bit of shock that it went the other way," said Robert Grindle, an analyst at Dresdner Kleinwort.

The market initially welcomed the announcement, he said, because it saw a lot of hidden value in Telecom Italia that the change would bring out.

But the reorganization was quickly eclipsed by concerns that TIM could fall into foreign hands, raising the specter of government interference and putting Premier Romano Prodi on the defensive after he raised concerns about the plans.

Telecom Italia's fortunes became further muddied by an unrelated wiretapping scandal that has implicated a former company security chief, but so far appears not to involve the company itself.

Within four days of announcing the restructuring, Chairman Marco Tronchetti Provera _ who gained control of Telecom Italia SpA in 2001 through the Olimpia holding company _ stepped down to "depersonalize" the spat.

The new chairman, Guido Rossi, has signaled that he intends to follow his predecessor's plans. But many observers say that Telecom Italia's long-term strategy remains unclear _ and that alone justifies concern by investors, who have seen Telecom Italia stock lose half its value since 2001, and even the government.

"What I can surely say is that there is a lack of communication and the strategy was not really explicit," said Francesco Sacco, a professor of corporate strategy at Milan's Bocconi University. "It seems to be a situation where the company is being managed in the main interest of one of the shareholders, and not in the interest of global shareholders."

Like the main incumbent telecommunication operators in Europe, Telecom Italia, which was completely privatized in 1997, has enjoyed a position of dominance in the Italian market _ with 70 percent of the fixed-line business.

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