M&A AND INVESTMENT BANKING

Case Study: Olivetti’s Take-Over of Telecom Italia

1

Case Study: Olivetti’s Take-Over of TI

Background

2

Birth of the Euro

Convergence of bond yields around those of German government bonds and switch of investment from government

bonds into equities

Development of the Euro-denominated corporate bond-market and the ability of firms to find long-term financing

Interaction between 3 major processes changing the economic and financial landscape

Privatization

Deregulation of markets

Globalization of world economies

The new role of the State

Retreat of the direct presence of the State from the economy

Dismantle the natural monopolies

Need of greater competition and efficiency, especially in the services’ sectors

The dismantling of domestic monopolies in the TLC segment

Deregulation stimulates market competition especially in the TLC sector

Less barriers to entry: possibility for new potential competitors to interconnect to the fixed network of the former

monopolist

In Italy, large number of new licenses granted to mobile phone operators (Omnitel, Wind and Blutel) and to fixed phone

network (Infostrada, Albacom, Wind and Tiscali)

3

The Economic Landscape in the 90s

A late-comer…

The government maintained control via the Istituto per la Ricostruzione Industriale (IRI), which owned

nearly 500 companies in the early 1990s

Presence of a large number of state-controlled enterprises compared to other EU countries

Government announced plan to sell-off many of the state-owned companies in 1992

Modernization of the Italian regulatory framework in the ‘92-’95 period

At the end of 1996, the State had ultimate control of 10.34% of Italian companies

…but a fast catch-upper

Significant efforts made to speed up the process

Between 1993 and 2001, the government privatized approximately 30 companies, raising €85 billion

Greatest contribution done by IRI with its large-scale privatization program over the period 1992-1998

Tremendous impact of privatizations on the Italian Stock Market

Over the period 1992-1999, stock market capitalization rose from $116 billion to almost $586 billion

(over 5.1 times the original amount)

Contribution of privatization operations: close to 52% of 1993 market capitalization and roughly 10% of

1999 market capitalization

A number of high quality IRI’s stocks have entered the MIB30 basket (e.g. Alitalia, Finmeccanica etc…)

4

The Italian Privatization Process

5

Privatization Operations in Italy (1992-1999)

Prior to 1992:

Alfa Romeo (auto 1987)

Enimont (chemicals 1989)

Cementir (cement 1992)

S. Paolo Bank (1992)

1993-1994:

IMI (merchant bank)

INA (insurance company)

Credit and Comit (two commercial

banks)

AST (steel)

SME Companies (Italgel, Gs, Autogrill

etc…)

1995-1996:

Last two tranches of INA

First two tranches of ENI

Ilva (spin-offs from the steel parent

company)

Dalmine (steel)

Italimpianti (plant engineering)

Alfa Romeo Avio (aero-engines)

1997:

Third tranche of ENI

Private sale of Cariplo Bank

Flotation of the majority stake of

Telecom Italia

First tranche of Aeroporti di Roma

Banca di Roma

1998:

Fourth tranche of ENI

Third tranche of S. Paolo di Torino

BNL

AEM (Milan’s electricity utility)

Alitalia public stake reduced to just

above 50%

Privatization of two major shipping

companies

1999:

Monte dei Paschi di Siena (bank)

Acea (Roma’s electricity and water

utility)

Condotte and Italinpa (public works

& infrastructures)

Grandi Motori Trieste (naval

engines)

Completion of Aeroporti di Roma

and Autostrade

Case Study: Olivetti’s Take-Over of TI

Olivetti and TI prior to the takeover

6

Privatization of Telecom Italia

7

Group born in 1994

Merger of 5 major Italian TLC companies into one company

SIP (fixed network continental operators), Italcable (fixed network intercontinental operator), Sirm

(naval communications), Telespazio (satellite TLC) and Iritel

Italy’s largest telecommunication company which owns TIM (number one European mobile phone

operator at that time)

Control of the TI Group before the privatization

Until 1996, TI was controlled by STET with a stake of 62.5% and the rest floated on the market

STET was a financial holding company controlled by IRI who owned 64% of share capital and the rest

floated on the market

Privatization completed in October 1997

Summer 1997: Merger of STET and TI into the new Telecom Italia listed in the stock market

On 4th October 1997: the Ministry of Treasury announced its intention to sell its 44.7% stake in TI

valued at 22.9 billion Lira

It was the largest single privatization operation ever carried out in Europe and created Italy’s largest

company in terms of market capitalization

Privatization of Telecom Italia

8

New Control of the Group

Initial goal was to create core holdings of 15% to ensure stability and promote global alliances

Government retained a 5% stake + a golden share with veto power over major decisions

Privatization program created a new group of companies without a dominant shareholder

Enthusiastic demand for shares from the public

3.9 million shares demanded against 1.7 million offered: 450’000 new shareholders

Institutional Investors: 280’000 shares of which 190’000 acquired by foreign investors

At the time of Olivetti’s tender offer, 37% of TI voting shares were held by foreigners investors (mainly

US Funds)

39%

15%

2% 3%

8%

5%

28%

TI Shareholders as at 31/03/1998

Foreign Institutional Investors

Italian Institutional Investors

Bank of Italy

Employees

Stable Shareholders (12)

Ministry of Treasury

Other

LIST OF STABLE SHAREHOLDERS

IMI 0.97%

Ass. Generali 0.55%

Alleanza Ass. 0.65%

Credit Suisse 0.86%

INA 0.80%

Credito Italiano 0.76%

Rolo Banca 0.31%

Comit 0.73%

IFIL 0.64%

MPS 0.63%

San Paolo 0.60%

Fond. Cariplo 0.50%

TOTAL 8%

Performance of Telecom Italia

9

A strong LBO candidate

Telecom Italia's Consolidated Data (in Lire Bln)

1997 1998

Revenues 44990 48507

% Growth 7.82%

EBITDA 21384 22888

% Growth 7.03%

EBITDA % of Sales 47.53% 47.18%

EBIT 8354 9186

% Growth 9.96%

EBIT % of Sales 18.57% 18.94%

Net Earnings 3448 5252

% Growth 52.32%

ROE 10.9% 15.3%

Cash Flow 14759 15732

% Growth 6.59%

Net Financial Position 15341 15826

% Growth 3.16%

Debt Ratio 31.7% 30.7%

Employees (tns) 126097 123966

TI had all the characteristics to be a good LBO target:

- Mature player (sixth largest telephone company in the world)

- Solid financial structure

- Favorable past with stable production of goods and stable cash flow

- Capable of providing constant future profit

SWOT ANALYSIS

STRENGHTS WEAKNESSES

Relationships Workforce

Knowledge Market share orientation

Customer base Network technology and systems

Ubiquity Regulatory hurdles

OPPORTUNITIES THREATS

Tariffs rebalancing Political pressure

A more customer-oriented strategy Globalisation

Telecom Italia 1997 – 1999 share price performance

Jan-97 Apr-97 Jul-97 Oct-97 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99 Jan-00

0

100

200

300

400

500

600

700

800

900

1,000

0

50

100

150

200

250

300

350

400

450

500

697.6%

64.6%

172.3%

Volume Telecom Italia S.p.A. FTSE Eurofirst 300 / Telecommunications FTSE Italy

Source: Factset as of 21 November 2012.

27th October

1997 Telecom Italia is

privatized through

the sale of c.35%

of its shares by

the Treasury

20th Febraury

1999 Olivetti announces

a Voluntary Tender

Offer on Telecom

Italia

21st May 1999 End of the VTO

with Olivetti owning

c.50% of Telecom

Italia shares

Sh

are

pri

ce

(re

ba

se

d t

o 1

00

) Vo

lum

es

(millio

n)

10

Olivetti New Strategy

11

On the brink of collapse

The company was losing money since 1990

Personal computer division was losing market share

Huge rights issue in December 1995, raising 2,257 billion Lire ($1.42 billion) and giving approximately

70% of Olivetti’s shares in foreign hands

After announcement of greater than expected losses for 1995, share price tumbled 14%

Pressure from investors led CEO Carlo De Benedetti to resign during H1 1996, who was replaced by

Roberto Colaninno (a De Benedetti manager)

Major restructuring program

Change in strategy by concentrating on telecoms through Olivetti’s Omnitel mobile and Infostrada

fixed-lines operations

Sale of the personal computing and other small businesses in early 1997 and the Olsy computer

services business in March 1998

This new focus on the telecoms business led to the decision to launch an hostile takeover bid for

Telecom Italia

Case Study: Olivetti’s Take-Over of TI

The Olivetti Offer

12

The Initial offer

13

Bid for 100% of TI’s voting shares

Early 1999: Olivetti started to work with its advisors Chase Manhattan, Donaldson Lufkin Jenrette, Lehman Brothers and

Mediobanca

Italy’s privatisation law of 1994 + presence of international investors in the ownership structure led Olivetti to bid for 100% of TI’s

voting shares

On February 20th, 1999, Olivetti sent a letter to Consob announcing the launch of a Public Tender Offer for 100% of TI’s share

capital and exactly 3 months later won the bid obtaining 52.12% of TI’s share capital and total control of the company

CEO of TI Franco Bernabè hired Credit Suisse First Boston, Banca IMI, Lazard Frères and JP Morgan as advisors

David against Goliath!

Market value of Olivetti at time of transaction was six times lower than TI

Difficult task of financing a €52.6 billion bid with a market capitalization of €9.4 billion

All indebtedness in Tecnost, a 97% owned Olivetti subsidiary, appointed as acquisition vehicle (NewCo)

Tremendous leverage:

Biggest component: Syndicated loan package of €22.5 bln (with 26 offers totaling more than €30 bln)

Other sources: €13.7 bln in new Tecnost bonds, €7.6 bln from Mannesmann sale and €7.4 bln in new Tecnost Equity

Details of the Initial offer: €10 per share for 5’255 mln ordinary shares:

€6 in cash

€2.6 in Tecnost bonds

€1.40 in Tecnost stocks

Total Value = €52.6 billion

Saving Shares (2’166 mln) excluded from the offer

Olivetti Strategic Plan (17/03/1999)

14

An ambitious plan

“A unique opportunity to guarantee the national and european development of the fixed and mobile

phone activities of the Group”

“Create the necessary economic and management conditions for TI to become a big and dynamic italian

industrial group in the TLC sector, with a strong client-oriented approach and innovative solutions, able

to compete successfully in the national and international market”

Strategic objectives

Buy back Savings Telecom up until 10% at €10

Increase TIM pay-out up until 90%

Decrease costs by Lire4’500 bln (lay off 13’000 employees in the fixed network activities)

Investments of Lire26’500 bln in the next 3 years (17’000 in the fixed network activities)

Fixed network: improve quality of investments, review commercial structure, annual EBITDA growth at

4%

Mobile network: keep TIM corporate autonomy, integrate commercial activities with the fixed network,

act as a european leader, CAGR EBITDA 10%

Focus on Europe, dismiss activities with low profitability, simplify holding structure

Sell Finsiel, Italtel, Sirti

TI Strategic Plan (10/03/1999)

15

TI defensive plan

After days of debate with its advisors, CEO Bernabè agreed 3 defenses moves designed to make TI too

expensive for Olivetti:

1st defensive option: convert the 2.2 mln savings shares into voting shares. By doing this, TI’s voting shares

total value would have exceeded €90 bln

2nd defensive option: repurchase 10% of the voting shares using cash on hand (buy back)

3rd defensive option: cash offer for all the floating TIM shares not already owned (40%). At the beginning,

the idea was to offer a stock offer (Ord. TI 5:4 Ord. TIM and Ord. TI 20:9 Sav. TIM) but it was switched to

a cash offer on 27/03/1999 after TI shareholders expressed concerns regarding the dilutive effective of a

share offer:

€6.84 per one Ord. TIM share (premium +/- 17%)

€3.85 per one Sav. TIM share (premium +/- 9%)

Total value around Lire44000 bln financed by increasing financial debt

Strategic objectives

Merge TI and TIM in order to enhance synergies (marketing, customer care, investments etc…)

Reorganize international activities

Dispose of business activities (Sirti/Finsiel/Italtel/Stream/Meie)

Sell real estate assets

Goals: Sales of €60500mln in 2002, Annual EBITDA of +8%

Reduce workforce by 40’000 people by 2002

TI EGM (10/04/1999)

16

Invalid letter of intention

22/02/1999: Consob declared that the letter of intention received 2 days before was invalid

Requested a guarantee of the completion of Olivetti’s planned sale of its existing telecoms businesses to

Mannesmann

Olivetti achieved to have the guarantee only 4 days later

26/02/1999: Consob declared Olivetti’s offer valid

Passivity rule

Surprisingly, TI did not use the 4 days to erect defenses

Passivity rule: once a bid is in place, the target can no longer adopt defensive moves without the approval

of at least 30% of its shareholders

Therefore, defensive plan had to be put to a shareholder vote

Extraordinary shareholders’ meeting (10/04/1999)

Only 22% of the shareholders attended the meeting

Turnout far short of the 30% quorum required to permit voting on defensive proposals

Additional shareholders milled around the place but never entered the hall, especially because on

29/03/1999 Olivetti had increased its offer to €11.50 per share or €60.4 bln in total

The Last Chance (22/04/1999)

17

Merger TI and Deutsche Telecom

After the disaster at the EGM, CEO Bernabè secretely decided to pursue the idea of a white knight

On 22/04/1999, announcement of merger via a share swap to create Deutsche Telecom Italia (combined

value of €200 bln)

NewCo regulated by German law (NewCo 1:1 DT ; NewCo 1:3 Ord. TI ; NewCo 1:5 Sav. TI)

Issue related to the German government control

German government had a 72% stake in DT meaning a 40% stake of the merged company

Italian Government was not happy with the idea of such a large stake by a foreign government in Italy’s

largest listed company

No agreement reached regarding the quick disposal of German government shares and Italian

government threatened to use its golden share to block the deal

The deal failed because of pressure from Italian government and lack of enthusiasm by investors

The Offering Period (from 21/04/99 to 21/05/99)

18

The shareholders’ vote and the aftermath

Shareholders began to submit their shares to Olivetti on April 30

On 20/05/1999 only 19.9% of acceptances

The contest ended late on May 21 when 6 of 7 of TI’s remaining core shareholders tendered, pushing the

acceptances over 50%

Olivetti ultimately received 52.12% (2’739’178’932 out of 5’255’131’631 shares) of TI’s voting shares at a

cost of €31.5bln

25/05/1999: TI’s board met and Bernabè and the non-executive directors resigned effective 28/06/1999

75%

6%

9%

10%

BREAKDOWN OF 52.12% ACCEPTANCES

International Institutions

Italian Retail

Core Shareholders

Italian Institutions

BREAKDOWN OF ACCEPTANCES

Estimated

Ownership

Acceptance as a

% of respective

group

Core

Shareholders

14% 88%

Italian Institutions 12% 83%

International

Institutions

52% 54%

Italian Retail 22% 30%

Change in Ownership Structure of the Olivetti Group

19

Bell SA

12%

Olivetti

97%

Tecnost

BEFORE THE DEAL

Bell SA

17%

Olivetti

73%

Tecnost

52%

Telecom Italia

60%

TIM

AFTER THE DEAL

Minority Shareholders

48%

Following the takeover deal:

Plan to transfer TI’s 60% stake in TIM directly to Tecnost failed (unsuccessful attempt to merge Target into NewCo)

2000: Approval of the merger between Olivetti and Tecnost (1.12 Olivetti voting shares per Tecnost share)

Case Study: Olivetti’s Take-Over of TI

The Deal Structure

20

Main Features of Colannino’s Hostile Takeover

21

Total value of the takeover (evaluated at final offer price): (100% of Telecom Italia ordinary shares) €60,434m

Total market value of the ordinary capital controlled: (Ord. Shares, on announcement: 19/02/1999) €47,769m

Total market value of the equity capital controlled: (Ord.+Saving Shares, on announcement: 19/02/1999) €61,155m

% of the ordinary capital delivered: 52.12%

Total value of the deal: €31,501m

Market value of the ordinary share before the offer: (Last month av.) €8.12

Value offered for an ordinary share (first offer): €10 23% Premium

Value offered for an ordinary share (final offer): €11.50 42% Premium

Offering period: from 21/04/99 to 21/05/1999

Bidder Company: Tecnost (controlled by Olivetti)

Payment (per share): Cash €6.92 + New Tecnost Bonds €2.90 + New Tecnost Ordinary Shares €1.68

The Right Price?

22

At the moment of the takeover bid, all TI multiples had a discount compared to the ones of main european competitors

Telecom Italia vs main european competitors (data as at 20/02/99)

European TLC Providers Price P/E P/CF EV/EBITDA

98(E) 99(E) 00(E) 98(E) 99(E) 00(E) 98(E)

France Telecom (F) 82.9 37.9 33.7 30.1 12.7 12.7 11.5 10.2

British Telecom (UK) 1069 32 30 28.5 14.8 14.2 13 9.6

Vodafone (UK) 1126.2 58.2 51.2 42.6 35.3 33.1 32.5 -

Deutsche Telekom (G) 39.1 45.4 42.8 36.3 9.5 9.6 8.9 8.2

KPN (NDL) 42.5 23.1 21.3 18.9 10.1 9.3 8.3 8

Portugal Telecom (Port) 44.7 19.5 16.9 15.1 8.3 7.5 7 -

Telefonica (ESP) 39.6 30.1 26.2 22 6.8 6.7 6.3 6.1

European Average 36 32.6 28.6 15.1 14.4 13.6 9

Telecom Italia 9.04 32.73 28.03 25.41 9.04 8.86 8.41 6.15

Telecom Italia Discount % -9.1% -14% -11.20% -40.10% -38.50% -38.20% -31.70%

TIM 5.6 35 31.1 26.7 23.9 21.8 19.5 14

EV/EBITDA

23

10.2

9.6

8.2 8

6.1 6.15

0

2

4

6

8

10

12

France Telecom British Telecom Deutsche Telekom KPN Telefonica Telecom Italia

EV/EBITDA 98(E)

EU Average

The Financing Structure of the Deal

24

ANALYSIS OF THE FINANCIAL DUTIES Per Share (in €) Per Share (in Lire) 100% (in €mln) 100% (in blnLire) 52.12% (in €mln) 52.12% (in blnLire)

Cash 6.92 13399 36366 70414 18955 36702

Tecnost Bonds 2.9 5615 15240 29508 7944 15380

Tecnost Stocks 1.68 3253 8829 17095 4602 8911

TOTAL 11.5 22267 60434 117016 31501 60993

ESTIMATION OF THE FINANCIAL RESOURCES

5’255’131’631 shares

100% (in €mln) 100% (in blnLire) 2’739’178’932 shares

52.12% (in €mln) 52.12% (in blnLire)

Cash:

New Tecnost Equity 23022 44578 12000 23236

Syndicated Loan 10465 20263 5455 10562

New Tecnost Bonds 2878 5571 1500 2904

36365 70413 18955 36702

Tecnost Bonds:

New Tecnost Bonds 15240 29508 7944 15380

Tecnost Stocks:

Syndicated Loan 8829 17095 4602 8911

Sources of Funds

25

SOURCES OF FUNDS

100% (in €mln) 100% (in blnLire) 52.12% (in €mln) 52.12% (in blnLire)

New Tecnost Equity 23022 44578 12000 23236

Syndicated Loan 19294 37358 10057 19473

New Tecnost Bonds 18118 35079 9444 18284

TOTAL 60434 117016 31501 60993

Equity 38.10%

High Yield 29.98%%

Senior Debt

31.93%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sources of Funds in %

61.91%

38.09%

Gearing Level

Total Debt

Total Equity

The Deal Terms

26

New Tecnost Bonds

One bond per one share tendered

Bonds issued by Tecnost International N.V. (owned 100% by Tecnost SpA)

5 years’ maturity from 23/06/1999 to 23/06/2004

Variable interest rate equal to Euribor + 185 bps

Total nominal amount of €9’444mln, of which €7’944mln issued for the takeover bid and €1’500mln subscribed by the

banks of the syndicated loan

Syndicated Loan

The syndicated loan of €10’057mln was organized by Chase Manhattan Plc

The syndicate (the group of lenders) was composed by Chase Manhattan Plc, DLJ Capital Funding Inc, Lehman Brothers

Commercial Paper Inc and Mediobanca Spa

In July 1999, the syndicated loan and the Mediobanca loan (total of €8’660mln) have been reimbursed thanks to the following

operations (in €mln):

Financial Indebtedness of Olivetti Group as at 30/06/1999 due to the takeover (in €mln)

Syndicated Loan 6060

Mediobanca Loan (Bridge Financing) 2600

Bonds Tecnost International N.V. 1999-2004 9443.6

Total 18103.6

Capital Increase Olivetti SpA 3016.4

Bonds Tecnost International N.V. 1999-2004 4500

Bonds Tecnost International N.V. 5% 1999-2009 1750

Press Reaction

27

“Yet that Olivetti is taking on a company more than five times

its size shows that Europe’s business mores are changing

quickly. The traditional reluctance to attack corporate giants,

political interventionism and closing of the ranks among

national business elites appear to be falling by the wayside as

Anglo-Saxon notions of shareholder value and corporate

governance take hold in Europe. That means Telecom Italia can’t

take too much comfort in history, even if Olivetti still has many

obstacles to overcome” Wall Street Journal, March 8, 1999

“By launching a Lire102,000 billion bid for a privatized group

on Saturday, Roberto Colaninno, chief executive of Olivetti, has

provoked what is a tantamount to an earthquake in the

traditionally closed and incestuous world of Italian capitalism

dominated by a few big influential players and their political

sponsors” Financial Times, February 22, 1999

“Comunque vada a finire la scalata di Olivetti al colosso delle

telecomunicazioni italiane non c’è dubbio che l’operazione

lascerà tracce profonde nell’economia del paese. Sui due fronti

ci si prepara allo scontro facendo trapelare fiducia per la

raccolta del consenso tra gli investitori, ma numeri certi non ne

fa nessuno. L’Olivetti, con l’Opa da 117 miliardi, ha già messo in

campo una leva finanziaria che non ha precedenti. Ha chiuso, in

meno di due settimane, il più grande prestito sindacato mai

realizzato. Martedi la Tecnost, braccio operativo dell’Opa,

delibererà una ricapitalizzazione da 12 miliardi di euro, con la

più imponente emissione di bond che sia mai stata registrata”

La Repubblica, April 4, 1999

“Olivetti’s victory after a 3-month battle proved that virtually

anything was possible in the European mergers & acquisitions

market, even US-style deals involving lots of leverage. Who

broke the ice? Colaninno’s financial advisers at Chase Bank.

Olivetti’s bid for Telecom Italia would probably not have been

made if Chase had not given Colaninno the confidence that the

bank could raise enough money on Olivetti’s behalf, $23 billion

in syndicated loans” Forbes, April 4, 2000

Case Study: Olivetti’s Take-Over of TI

What Happened after the LBO?

28

The 2nd LBO: Pirelli’s Acquisition of Olivetti

29

Control of TI by Tronchetti Provera

July 2001: Olimpia Spa, a vehicle company owned by Pirelli Spa, Edizione Finance International SA (Benetton Group), Intesa BCI

and UniCredito Italiano Spa, acquired approximately 27.7% of Olivetti’s ordinary share capital (just short of the 30% threshold

requiring an offer to all shareholders

New management started a financial restructuring activity in order to focus TI’s activity on the core business

Main features of Pirelli’s acquisition

Total value of the takeover: (27% of Olivetti ordinary shares) €8,217m

Total market value of the ordinary capital controlled: (Ord. Shares, on announcement: 01/07/2001) €15,984m

Total market value of the equity capital controlled: (Ord.+Saving+Pref. Shares, on announcement: 01/07/2001) €16,378m

Market value of the ordinary share before the transaction €2.30

Value paid per ordinary share: €4.17 81% Premium

Transaction date: 28/07/2001

Payment: Cash

Bidder company: Olimpia, not-listed vehicle company controlled by Pirelli Spa (60%)

The Pyramid Ownership Structure

30

BEFORE PIRELLI’S ACQUISITION (before 28/07/2001)

Bell SA

21%

Olivetti

55%

Telecom Italia

TIM

56%

SEAT PG

61%

AFTER PIRELLI’S ACQUISITION (after 28/07/2001)

Marco Tronchetti Provera

55%

CAMFIN

25%

Pirelli&C.

47%

Pirelli SpA

60%

Olimpia (not listed NewCo)

27%

Olivetti

55%

Telecom Italia

TIM

56%

SEAT PG

54%

The Shortening of the Group Structure

31

New ownership structure at the end of 2004

May 2003: Olivetti Shareholders’ meeting adopted the plan to merge TI into Olivetti

Also Pirelli group chain was shortened at the top (merger between Pirelli&C. and Pirelli SpA into Pirelli&C. SpA)

2004: Tender offer of TI on TIM was announced and a merger followed

Marco Tronchetti Provera

55%

CAMFIN

25%

Pirelli&C. SpA

50%

Olimpia (not listed NewCo)

21%

Telecom Italia

TIM

86%

T.I. Media

62%

Level of Indebtedness

32

Telecom Italia’s consolidated data (mln €) *

Total Leverage (Net Financial Position / Equity)

Company 1998 1999 2000 2001 2002 2003

T. Italia 0.51 0.48 1.13 1.66 2.12

2.15 Tecnost -0.64 1.49 3.03 3.2 3.05

Olivetti 1.28 2.85

Pirelli SpA 0.28 0.6 -0.57 0.31 0.38 0.6

Pirelli&C. 1.87 2.16 -1.07 1.12 1.22

Camfin 0.37 0.77 0.65 0.53 0.55 0.72

31/12/1998 31/12/1999 31/12/2000 31/12/2001 31/12/2002 31/12/2003 Revenues 24432 26995 30116 32016 31408 30850

% 10.49% 11.56% 6.31% -1.90% -1.78%

Ebitda % 45.90% 43.10% 43.77% 42.65% 44.62% 46.28%

Ebit % 23.70% 23.10% 18.19% 16.00% 19.28% 22%

Net Earnings 1978 4939 -941 -3090 -773 1192

Net Financial Position 8287 10246 37910 38362 33399 33346

Total Market Capitalisation 49903 100477 89191 73323 56524 33570

Net Debt/Ebitda 0.74 0.88 2.88 2.81 2.38 2.34

Net Debt/Market Cap 0.17 0.10 0.43 0.52 0.59 0.99

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1998 1999 2000 2001 2002 2003

Increasing Financial Leverage

Net Debt/Ebitda Net Debt/Market Cap

* Numbers from 1999 to 2002 have been readjusted to include Olivetti SpA (that has merged with TI in 2003)

Returns of Group’s Companies

33

Annual Equivalent Rates of Return % Asset Post Privatization Public Company Colaninno's Control TrProvera's Control 1997-2004

MIB30 4.5 37.3 0.5 -4.4 4.5

Camfin 17.3 6.8 84.7 -6.6 17.3

Pirelli&C. 7 18.6 44.6 -11.6 7

Pirelli Spa -11.1 8.2 5.4 -34.3 -11.2

Olivetti 30.6 354.1 -11.5 -20.4 30.6

Telecom Italia 10.8 48.8 3.4 -1.2 10.8

TIM 8.7 41.5 2.5 -1.3 8.7

-15

-10

-5

0

5

10

15

20

25

30

35

MIB30 Camfin Pirelli&C. Pirelli Spa Olivetti Telecom Italia TIM

1997-2004 Annual Equivalent Rates of Return %

Case Study: Olivetti’s Take-Over of TI

Telecom Italia Today

34

TI Ownership Structure as at 30/09/2012

35

In 2007, Telco SpA bought Olimpia’s shares in TI

Telco SpA is a holding company which owns 22.39% of

TI Group and is composed by:

Mediobanca 11.57%

Assicurazioni Generali 30.67%

Intesa San Paolo 11.57%

Telefonica SA 46.179%

The Burden of the Debt

36

2004 2005 2006 2007 2008 2009 2010 2011

Revenues 28292 29919 31275 31290 28746 26894 27571 29957

Ebitda 12864 12517 12850 11617 11090 11115 11412 12246

Ebit 7603 7499 7437 5764 5437 5499 5864 6761

Earnings 2834 3690 3003 2455 2178 1596 3575 -4280

Net Financial Debt 32862 39858 37301 35701 34039 34747 32087 30819

Debt Ratio 61.20% 59.60% 57.90% 57% 56.70% 55.60% 49.20% 53.30%

Net Debt/Ebitda 2.6 3.2 2.9 3.1 3.1 3.1 2.8 2.5

Bernabè came back as CEO of TI in 2007

The deleverage process is still continuing

Reducing the level of debt is a fundamental step for TI Group

The aim is to reach the year 2015 with a “normal” level of debt (i.e. in line with competitors)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Net Debt/Ebitda

TI Level of Debt vs Main Competitors

37

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2004 2005 2006 2007 2008 2009 2010 2011

Net Debt/Ebitda

Orange France Telecom British Telecom Deutsche Telekom Telecom Italia

Credit Ratings for long-term debt S&P Moody's Fitch Orange France Telecom A- A3 A-

British Telecom BBB- Baa2 BBB

Deutsche Telekom A- A3 A-

Telecom Italia BBB Baa2 BBB

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

0

300

600

900

1,200

1,500

0

400

800

1,200

1,600

2,000

(3.0%)(51.7%)

8.2%

Volume Telecom Italia S.p.A. FTSE Eurofirst 300 / Telecommunications FTSE Italy

Telecom Italia share price performance since January 1997

Source: Factset as of 21 November 2012.

Sh

are

pri

ce

(re

ba

se

d t

o 1

00

) V

olu

me

s (m

illion

)

%

100

38