Shaking the 8-Ball on Italy's La 7

Telecom Italia sale leaves future cloudy for small net

With Monday's sale of Telecom Italia to a consortium led by Spain's Telefonica and a group of Italian financial institutions, the fate of Italy's smallest national network has been cast into doubt.

La 7 — the only national network not owned by Italian state broadcaster RAI or Silvio Berlusconi's Mediaset — is the core holding of Telecom Italia Media, which also operates MTV-Italia. When the Telefonica-led group won its bid for Telecom Italia, it got the media subsidiary in the deal as well.

Questions about La 7 and its 2.2% market share come at a time when the Italian media sector as a whole is going through significant changes. The so-called Gentiloni Reform that would bar any single broadcaster from owning more than 45% of the entire market is waiting on approval from European Union regulators. And RAI is in the midst of re-inventing itself, announcing it will ban lowbrow programming such as reality shows from its channels and vowing to remove advertising from one of its three networks to absolve it from commercial concerns.

Additionally, the government is forcing both RAI and Mediaset to migrate one network each to digital frequencies by 2009, a move Mediaset says will cost it hundreds of millions of euros.

"In this context, nobody can say what will happen to Telecom Italia Media," said Fabrizio Baroni, a consultant with KPMG in Italy. "I don't even think Telefonica knows at this point. Is the convergence they're ... looking for between telecommunications and content? If so, they will keep it. But if it's in some other direction, then selling off Telecom Italia Media will be one way to raise some cash."

Telefonica already has said it will conduct a capital increase to raise money. The move would slightly reduce the stakes held by Telefonica and partners that include insurance company Generali, bankers Mediobanca and Sanpaolo and Benetton-owned holding company Sintonia. But it would open the door for another company — Mediaset is considered the most likely candidate — to take a stake of 3%-10% in the holding company that owns Telecom Italia.

If Telecom Italia still owns La 7 and MTV-Italia, the Mediaset stake could present some regulatory hurdles. And that is one of the reasons Mediaset is unlikely to be a buyer if Telecom Italia Media is shopped around — even though such a possibility has been raised in some Italian newspapers.

"Mediaset would never be given permission to take over Telecom Italia Media because there are already concerns that Media-set's market concentration is too great," said Stefano Quintarelli, an author and independent consultant and technology expert. "But more importantly, it doesn't make any sense for Mediaset, because they wouldn't benefit much from adding a small network like La 7."

So what companies would be interested in acquiring Telecom Italian Media? The names of three leading Italian publishers come up regularly among analysts and industry players: RCS Media Group, owner of leading daily newspaper Corriere della Sera; Gruppo Espresso, which owns newspaper La Repubblica and newsmagazine L'espresso; and DeAgostini, the book publisher that has been making a push into the film and TV sectors with the acquisitions of art house film distributor Mikado and TV content company Magnolia.

"The television sector is moving toward the Internet and digital content and so the acquisition of a small traditional network like La 7 makes no sense for an established broadcaster already looking toward the future," Quintarelli said. "But for a big media presence with money to fully develop it, La 7 can be a good entry point. From that perspective, it makes sense."

It may be a while before the outcome is known. The Telefonica-led group is keeping its cards close to the vest, and the Telecom Italia acquisition will not even officially close before October. But investors already are licking their lips at the prospects. Shares in Telecom Italia Media leapt 5% Monday on speculation that the company could be sold at a premium, and this week at least two Italian investment banks initiated coverage of the usually lightly traded company with a "buy" rating.
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