Italy's biggest telecoms firm faces an uncertain future

THERE could not be a better warning of the risks of getting involved with Italy’s national phone company: in late February Telecom Italia said an investigation into alleged large-scale tax fraud andmoney-laundering involving Sparkle, its wholesale voice and broadband unit, and a rival broadband firm, Fastweb, had forced it to delay the announcement of its 2009 results by a month. The pair arethought to have become embroiled in a scam orchestrated by the Calabrian mafia. Meanwhile, discussions about Telecom Italia’s future are coming to a head, with Telefónica, Spain’s leading operator,expected to play a crucial role.
In 2007, in the aftermath of two leveraged buy-outs which left Telecom Italia with a massive burden of debt, the government arranged for the Benetton family,Telefónica and a group of local financial institutions—Mediobanca, Intesa Sanpaolo and Generali—to take control of the operator. Telecom Italia’s controlling shareholder at the time, Pirelli, had been inserious talks about selling to America’s AT&T and Mexico’s América Móvil, but the government had wanted to keep Telecom Italia in national hands.
Pirelli lost more than €3 billion ($4.1 billion) onits stake in Telecom Italia, and the operator has proven a similarly disastrous investment for the present shareholders. The price of its shares has fallen by more than half since they took control dueto declining revenues and concerns about its debt. That, in turn, has put pressure on the banks to write down their investment accordingly. They are now pushing for a drastic solution.
The mostobvious exit, reckon some of the firm’s Italian shareholders, is for Telefónica to buy Telecom Italia, deepening an industrial partnership which has already yielded some €1.3 billion of synergies since2008. Apart from its debt and some operational problems at its Italian mobile business that should not be too hard to iron out, Telecom Italia is in reasonable shape. It faces comparatively little...