Italy’s corporate zombies haunt Letta reboot

October 9, 2013

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Italy’s corporate zombies are testing Prime Minister Enrico Letta’s reform intentions. The sagas of Alitalia and Telecom Italia share a common theme: both the airline and the telecom operator are suffering under shareholder structures derived from past attempts to block foreign ownership. For Letta, they offer a chance to prove that he can make tough decisions – or that he’s happy with business as usual.

Telecom Italia’s current ownership, a hodgepodge of banks and Spanish group Telefonica, derives from the opposition of Romano Prodi’s government to a bid by America Movil and AT&T in 2007. The arrangement hasn’t helped Italy: analysts at Sanford Bernstein say it is the only country they cover where the number of broadband customers has fallen in recent years.

Full foreign ownership still isn’t imminent: Telefonica, the Spanish group, is gradually taking control over Telco, the company that controls Telecom Italia, but its main goal may be to control the company’s Brazilian assets. That hasn’t stopped Italian politicians opposing the deal, to the point of considering changes to the takeover law. Letta so far has paid lip-service to national angst.

The situation at Alitalia is trickier. The flag carrier is days away from bankruptcy. The most logical solution would be to hand control to Air France-KLM, which tried to take control in 2008 but was blocked by Silvio Berlusconi. That, however, would require radical surgery for the company, which doesn’t know what “profit” means. It would run into union opposition. Alternative, balmy solutions to keep Alitalia afloat are doing the rounds, like calling on state railway operator Ferrovie dello Stato.

Fear of foreign ownership isn’t unique to Italy, but the Telecom/Alitalia furore comes at a crucial time. Letta’s government is in reboot after fending off an attempt by Silvio Berlusconi to trigger new elections. Italy needs to attract foreign investment to help reinvigorate its sluggish economy. Letta promised to capitalise on his renewed parliamentary support to make Italy competitive. He will have to reform labour markets and the public sector, which may be unpopular within his own party. Tougher challenges than either Telecom Italia or Alitalia lie ahead. If he can’t do the simple stuff, no one will trust that he can tackle the hard work.

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