Telefonica-led Consortium Gains 23.6% of Telecom Italia Stock

| May 2, 2007 | Business Telecom Services - Europe | Competitive Intelligence Report

Analyst: Joel Stradling

Current Perspective: Positive
Vendor Importance: High
Market Impact: High

Event Summary

On April 28th Telefonica and four other investors (i.e., Generali, Mediobanca, Intesa Sanpaolo and Benetton) joined forces to buy 100% of the stock of Olimpia. The new consortium, in which Telefonica holds 42.3% of the shares, will have a 23.6% participation in Telecom Italia’s capital (18% indirectly through Olimpia and 5.6% directly), thus becoming the largest shareholder of the Italian operator.

Analytical Summary

• Current Perspective: Positive on Telefonica’s new shareholder status in Telecom Italia, because the arrangement gives both carriers new opportunities for realising group synergies across European and Latin American markets. Telefonica does not have implicit decision-making power in the Telecom Italia Group’s future, but nonetheless, board representation (two seats out of 19) will encourage cooperation and a stronger combined front.

• Vendor Importance: High to Telefonica, because the company needed to identify a sensible target for its EUR 1.5 billion acquisition fund and, at the same time, prevent certain competitors, such as America Movil (Brazilian mobile operator), from consolidating their positions in the markets where Telefonica has strong interests.

• Market Impact: High on the global telecom services market, because this is a major event with ramifications across several geographies and markets. For example, the move consolidates Telefonica's position in the Brazilian mobile phone market, while in Europe, Telefonica/Telecom Italia have boosted their abilities to target German clients with national services. Finally, Telefonica and Telecom Italia should be able to apply more pressure on rivals in retail multinational and international wholesale carrier services, particularly for connectivity in the Mediterranean basin and towards Latin America.

Recommended Competitor Actions

• Orange Business Services should emphasise the France Telecom Group’s acquisition progress in the Middle East, such as the recent purchase of 51% of the stock in Bahrain-based Lightspeed Communications through Jordan Telecom. Orange Business Services should also highlight its existing extensive international presence and holdings to deflect attention away from Telefonica’s growth.

• Global carriers need to ramp up their activities in Asia-Pacific, the Middle East and Latin America via acquisitions or solid partnerships in order to be able to compete against Telefonica’s growing strengths in these geographies. In particular, competitors need to be prepared to respond to growing pressure from Telecom Italia/Telefonica in multinational services in these regions.

• Pan-European providers COLT Telecom, BT Spain, Orange Business Services and Verizon Business should emphasise the depth of metropolitan penetration that their networks support in the rest of Europe, including France and Italy. Telefonica does not offer the same level of metro access and geographical coverage as these carriers, and this should be pointed out to multinationals seeking pan-European network services.

Recommended End User / Customer Actions

• MNCs should ask Telefonica how it intends to leverage its assets to offer specific service benefits. Yes, the company has assets distributed throughout the world, but are these assets going to be effectively organised to deliver tangible product features?

• Large enterprises that require pan-European solutions need to ask Telefonica how the company can offer on-the-ground support to multiple European destinations. End users will find that, in terms of commercial presence and momentum, several other operators such as AT&T, BT Global Services, COLT Telecom and Orange Business Services can offer more comprehensive services and support.

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