Telecom Italia to grow core profits from 2020, to explore all options on network

By Agnieszka Flak

MILAN (Reuters) - Telecom Italia (TIM) on Thursday pledged to accelerate cost cutting, increase shareholder returns, cut debt and grow core profits from next year in the first three-year strategy plan under new Chief Executive Luigi Gubitosi.

TIM has been caught in a battle since early last year between top shareholders Vivendi and activist fund Elliott over how to revive Italy's biggest phone group, an underperforming business saddled with more than 25 billion euros (22 billion pounds) of debt.

Setting its plan for 2019-21, TIM sought to convince investors it can reverse years of sluggish share price performance and cope with new rivals that are appearing in both broadband and mobile: broadband group Open Fibre is rolling out a rival fibre optic network, while French telecoms group Iliad has launched a low-price mobile offer for Italy.

The incumbent's finances have also been stretched after it bid 2.4 billion euros - much more than initially planned - to secure airwaves in Italy's fifth-generation mobile auction.

The former state phone monopoly said it would revamp its domestic business, focus on quality and scale, and invest around 3 billion euros per year in Italy over the plan period.

It also plans to grow its Brazilian operations and pursue several strategic initiatives to unlock value.

Those include a network sharing agreement with Vodafone announced on Thursday to speed up deployment of fifth-generation mobile phone services and talks on a potential combination of their telecoms towers assets.

TIM had also launched negotiations with smaller broadband rival Open Fibre on "all possible options including a full business combination on fixed network".

The future of TIM's fixed-line network has been a key bone of contention between Elliott and Vivendi, TIM's top shareholder with a 24 percent stake. Elliott wrested board control from Vivendi last May.

While the activist fund had been pushing for the spin-off of TIM's network and its merger with Open Fibre - an idea also supported by Italy's government -, Vivendi has opposed TIM losing control of the network, its biggest asset.

TIM's shares have lost more than 30 percent since March last year, partially due to the governance battle between its top two shareholders, which other investors say is distracting management from fixing the company's operational problems.

The two adversaries will again face off on March 29 when shareholders are asked to vote on Vivendi's request to replace five board directors appointed by Elliott. The strategy unveiled by Gubitosi, an Elliott ally, on Thursday, might make it more difficult for Vivendi to regain the upper hand next month.

TIM said group organic earnings before interest, taxes, depreciation and amortisation (EBITDA) and service revenues would decrease by a low single digit this year, but grow at a low single digit rate in 2020 and 2021.

Adjusted net debt is expected to fall to around 22 billion euros by 2021, before inorganic actions.

For 2018, the company reported a 3.6 percent drop in group revenues to 19.1 billion euros, roughly in line with an analyst consensus provided by the company. Organic EBITDA, excluding non-recurring items, fell 3.4 percent to 8.1 billion euros, in line with expectations.

(Reporting by Agnieszka Flak; Editing by Alexandra Hudson)