It has been a very hot summer in Italy, and in Telecom Italia's (TI) boardrooms. Its first-half results, published 8 August, were not encouraging: profit margins were down 24% year-on-year, revenues contracted by 3.3%, net debt rose above €37 billion and, most importantly, results from foreign activities in Brazil (TIM Brasil), recently the main driver for growth, were not as good as expected.
TI's share price recently tumbled to an all-time low - shares are currently trading in the region of €1.1, whereas back in April 2007 when Telefonica bought a 40% stake in Telco (the financial holding company) it paid more than twice that amount for TI shares, at €2.82 each.
If Telefonica thought it had struck a good bargain, surely now it must be thinking about a full take-over, certainly rumours abound in Italy to that effect.
However, the government has given clear signals that it is happy with the management. It also seems supportive of a national champions policy, as it showed with the troubled Italian air carrier Alitalia. The government prefers to run the airline in administration, rather than sell it to Air France. It is unlikely that we will see Telefonica gain control of TI in the short term.
At the end of last month TI published a set of voluntary undertakings that are in consultation. These consist of an adapted version of what BT proposed back in 2005 in the UK to Ofcom, which led to the creation of Openreach.
TI's ten obligations are supposed to be about creating a non-discriminatory environment for the provision of regulated wholesale products, introducing a new code of conduct for the newly created division named Open Access. TI's voluntary offer does not go as far as BT did. In particular, it doesn't suggest a physical separation of the regulated business, instead some measures are not focused on producing a competitive environment, so much as generic customer satisfaction. Also, most of these obligations already exist on paper.
In return, TI is asking the regulator for seven legal dispute cases to be removed on the grounds that the newly offered undertakings would create healthier market conditions and would make such proceedings irrelevant. In the meantime they have been suspended.
The proposal is still in the early stages and it is likely to receive considerable criticism from alternative operators. The final call on TI functional separation is still far away and likely to be harsher than TI hoped. Not even the regulatory front will help the troubled Italian incumbent to escape its currently difficult situation.