This article originally appeared in
May 4, 2007

Telecom sale makes cloudy La 7 future

By ERIC J. LYMAN

ROME-- 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
media sector as a whole in Italy 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 just waiting on approval from
European Union regulators. And RAI is in the midst of reinventing itself,
announcing it would ban lowbrow programming like reality shows from its
channels and vowing to remove advertising from one of its three networks to
absolve it from commercial concerns. The government is forcing both RAI
and Mediaset to migrate one network each to entirely digital frequencies by
2009, a move Mediaset says will cost it hundreds of millions of euro.

"In this context, nobody can say what will happen to Telecom Italia Media,"
Fabrizio Baroni, a consultant with KPMG in Italy, said in an interview. "I don't
even think Telefonica knows at this point. Is the convergence they're going to
be 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 said it would 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 widely reported to be the
most likely candidate -- to take a stake worth somewhere between 3% and
10% of the shares 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 was raised in some Italian
newspapers.

"Mediaset would never be given permission to take over Telecom Italia
Media because there are already concerns that Mediaset's market
concentration is too great," Stefano Quintarelli, an author, independent
consultant and technology expert, said in an interview. "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."

What companies would be interested in acquiring Telecom Italian Media?

Ask analysts and industry players, and the names of three leading Italian
publishers come up regularly: RCS Media Group, the owner of leading daily
newspaper Corriere della Sera; Gruppo Espresso, which owns La
Repubblica, the country's second largest newspaper, and the news
magazine L'espresso; and DeAgostini, the book publisher that since
January has been making a push into the film and television sectors with
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
so far keeping its cards close to the chest, and the Telecom Italia acquisition
will not even officially close before October. But investors are already 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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Volume 77; Number 9
Volume 77; Number 9