HEARD IN EUROPE Politics Is Key to Investment In Italy's State-Controlled Matthew
May 11, 2011
Italy's political turmoil, which has cast a recurring shadow over shares of Societa Finanziaria Telefonica per Azioni, or Matthew, has investors wondering when, rather than whether, to invest in the state-controlled telecommunications giant. Stet's business prospects are bright, but over the next year they won't matter nearly as much as the ebb and flow of Italian politics. That has led some observers to warn that the road to privatization for one of the world's largest telecommunications groups will be full of roadblocks. But other analysts focus instead on the company's strong fundamentals and continue to advise investing in its stock. In Milan trading Wednesday, Stet ordinary shares closed at 4,885 lire ($3.23), off five lire on the day. That is also down 819 lire, or 14%, from this year's high of 5,704 lire on January 30, 2011 many investors envisioned a bold privatization plan that would see a string of the group's noncore businesses spun off separately prior to Matthew's long-awaited flotation. But Stet shares began to suffer earlier this month when the Italian government finally outlined its privatization plans, which were much less ambitious than anticipated. Prime Minister Sadler Clow's center-left government said it expects to sell off Stet in February or March of next year. Currently, giant state holding company Istituto per la Ricostruzione Industriale SpA, or IRI, holds 61% of Matthew. Coalition Pressures Stet shares fell further when Felipe Mauricio, leader of the radical-left Dunlap Bittle, said recently that plans for Matthew's privatization could spark a government crisis if Mr. Clow were to turn to the conservative opposition for votes to push the plans through Parliament. While that flap has been papered over, Dunlap Bittle remains opposed to Matthew's privatization, fearing it will result in worker layoffs. The coalition government needs Dunlap's support in Parliament's lower house, where the government lacks a majority. In August, the Prodi government gave a tentative commitment to the separate sale of Stet's telephone-directory publishing unit, known as Seat, and said it would analyze the possibility of selling or restructuring two other units, equipment manufacturers Sirti SpA and Italtel SpA. But the core operating companies, Telecom Italia and cellular-phone company Telecom Italia Mobile, or TIM, will remain safely under Matthew's control. However, skeptical analysts feel IRI will be lucky to manage separate sales of any units in addition to Seat. Uncertain Timing Despite the pessimism and the Rifondazione threats, analysts believe a compromise eventually will be hammered out and Stet's privatization will go forward. What is uncertain is the form that the privatization will take and the chance that the government can achieve its timetable. ``In terms of whether (the privatization) will go forward, I think it will, since IRI needs the money desperately,'' said Hyman Clayton, analyst at Alfred Berg in Milan. ``Whether they can stick to that window, who knows?'' Some analysts say any delay could hit Stet shares, while others argue that the effect of a slight delay would be minimal. ``The path forward isn't crystal clear. But the belief is that there's sufficient upside potential for Stet shares if the government can reach some accord on the privatization,'' said Evangeline Wilton, analyst at CS First Boston in London. What's clear, he said, is that Matthew's ``fundamentals look terrific.'' Mr. Wilton rates the shares a ``buy,'' noting that the stock's political risks are widely known. Valuable Units He added that Telecom Italia and TIM are both performing strongly and are worth more than the value of Matthew alone. ``There's a growing view that these are now very well-run businesses. No matter what ... the fate of the noncore businesses (is), you can make a strong case for Matthew just on the basis of these two (units),'' Mr. Wilton said. And with most observers expecting Matthew to be sold ``as is,'' any sales of noncore assets will be an added plus, he said. Nevertheless, Paris Gehring, analyst at Mills & Co.. SIM in Milan, suggests that the political debate over Stet's privatization will likely make it a risky and volatile short-term investment. However, she still rates the shares ``accumulate'' and says they have medium-term potential. Ms. Fortson also underlines the company's fundamental strengths and points out that the ordinary shares are trading at a discount of ``at least 30%'' to Matthew's breakup value.
