Telecom Italia's Palace Intrigue Is a Sorry Sight

(Bloomberg Opinion) -- Telecom Italia SpA's headquarters sits about 200 meters from the Porta Salaria, the city gate through which salt arrived in Ancient Rome from the Adriatic Coast.

Some of that salt is being rubbed into the wounds of the aggrieved Italian carrier, which on Thursday announced a 2 billion-euro ($2.3 billion) impairment on the value of its home operations, partly a consequence of new competition from low-cost rival Iliad SA. The shares fell as much as 6.5 percent, extending a 25 percent decline this year.

The writedown adds fuel to the heated confrontation between its two biggest shareholders: French media conglomerate Vivendi SA and activist investor Elliott Management Corp.

It could provide ammunition for Elliott's board nominees, who occupy the majority of seats after ousting Vivendi's appointees in April, to replace Chief Executive Officer Amos Genish with an executive they might deem more amenable. The American firm has been pushing for the divestment of some network operations. Genish has been adamant that control of Inwit, the tower business in which Telecom Italia retains a 60 percent stake, is essential for the rollout of 5G networks. Removing him might clear Elliott's path.

Yet it could just as readily serve as a catalyst for Vivendi to call for a new shareholder vote on the composition of the board. Vincent Bollore, the billionaire who controls the French firm, was considering such a move as early as June, Bloomberg News reported at the time. Within 10 minutes of Telecom Italia announcing the impairment on Thursday evening, Vivendi issued a statement questioning the "sudden and unusual" timing, saying it was destabilizing for it to land in the middle of the financial year. Such decisions are usually made at the end of the year, runs its argument, and it was the Elliott-controlled board which approved the step. Vivendi is pointing fingers.

It's hard to criticize the timing of internal assessment of the company’s finances without being a fly on the wall of Telecom Italia's board meetings. But it does seem unusual.

The palace intrigue makes it difficult to evaluate Genish’s operational effectiveness. He only presented his turnaround plan in March, and in the intervening months has been beset by distracting board conflicts. Uninspiring third-quarter earnings met expectations, excluding the impact of the charge. He has succeeded in reducing costs and boosting free cash flow, though that might be partly attributable to cyclical spending trends. Maybe he could have done better if he hadn’t had all of these board-level distractions.

Irrespective of any motive behind the impairment, Vivendi's assessment of its impact is correct: it is destabilizing. That uncertainty means Telecom Italia is trading at just 7.1 times forward earnings, compared with the 18 times average of its peers. It’s hard to see that improving unless, as I've previously recommended, the squabbling parents settle down and let Genish get on with his day job. 

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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