Efforts by Pirelli to offload its 18% stake in Telecom Italia are nearing endgame. The problem is that potential buyers are driving a hard bargain, increasing the financial pain felt by Pirelli over the lifetime of its telecom investment.

The one serious trade bidder for the stake, Spain’s Telefónica, pulled out of the running just weeks after expressing an interest in February (click here). This would appear to leave only private equity investors and other Italian financial institutions.

They are reluctant to offer Pirelli much in the way of a premium on TI’s current share price. This currently hovers around the €2 per shared mark, or roughly half of what Pirelli originally paid back in 2001. To an extent, TI is making their case for them as with recent downbeat forward-looking statements about its business.

While it is tempting to conclude that large investors are once more falling out of love with traditional telco equity, it is more likely that the problem is specific to Telecom Italia. Its track record and a delinquent approach to corporate control and governance would deter many bidders.

This is despite the fact that buying Pirelli’s 18% stake would, under Italian law, give effective day-to-day control of the company to the purchaser. Perhaps a fear of the other vested interests within and around TI, including the Italian government, is responsible for the lack of serious interest except at firesale prices.
Jim Chalmers