Italy's breakthrough deal

Global Finance, Dec 1997/Jan 1998 by Glover, John

Another vital step in preparing the company for privatization came in July, when Telecom Italia signed a memorandum of understanding to link up with AT&T and its international alliance Unisource. That was a crucial move to prepare the company for deregulation, when it will have to contend with a slew of new competitors-the most worrisome of which may be Enel, which announced a joint venture with Deutsche Telekom and France Telecom. At the same time, Italy's parliament finally approved legislation setting up a regulatory office. "That was the final piece of the jigsaw allowing the operation to go forward," says BZW's Kirwan-Taylor.

Given Italy's lack of a tradition of public companies owned by the market, the treasury and its advisers decided to create a stable shareholder base (azionariato stabile) of strategic investors. Each would have a small stake in the company, to be retained for at least three years. "In the Italian context it made a lot of sense," notes Euromobiliare's Gastaldi. Adds Grilli: "If the equity market is large enough, with enough institutional investors, the need for an azionariato stabile is much less."

Then the plot thickened. The Prodi government was the driving force behind getting the privatization done. But suddenly Prodi lost a confidence vote and handed in his resignation after his allies in the Communist Refoundation party withdrew their support for his budget. "That added complexity to something that was complicated enough already," sighs Grilli. Then BZW's parent, Barclays Bank, decided to sell its equity operations, which might have caused a hitch. But the treasury crossed its fingers and pressed ahead. "We felt that the demand was there and that Telecom could be sold on the basis of its own merits," Grilli says.

The complications didn't end there. Shortly after the sale Rossi stalked out of a board meeting and resigned. The reason: a spat over corporate governance. Rossi, it transpired, wanted the closest possible oversight of management; executives, led by Tommasi di Vignano, resisted the move. Suspicions that Tommasi had government backing for his stand raised the specter of an uncontrolled fiefdom being recreated in the newly privatized company. Meanwhile, a report from Confindustria, the powerful employers' association, complained that the privatization of Telecom was a step forward "only in so far as it leads to the real liberalization and opening to competition of the Italian telecom industry."

"Tommasi is not a Bernie Ebbers," says a Milan analyst who complains of Tommasi's "lack of vision." But Ebbers's Worldcom is planning an Italian investment next year, as are such other players as British Telecom. In that tougher environment, what counts at Telecom Italia will not be political clout but business acumen. And that will be the real measure of success of continental Europe's largest-ever privatization.