Telecom_Italia_Investment_Profile

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					                                                                        Industry view:                   UNATTRACTIVE                                                        N. Landell-Mills CFA
     Telecom Italia SpA                                                 Company view:                  UNDER-PERFORM                                         Indigo Equity Research Limited
     Latest results:                 Q3 2010                            Company Rating:                       LOW    MED.   HIGH                        info@indigo-equity-research.com
     Country:                            Italy                                       Risk                      -      -      1.00                           www.indigo-equity-research.com
     Sector:                        Telecoms                                         Quality                  1.00    -       -

     Bloomberg Ticker:                 TIT MI                                        Valuation                1.00    -       -                                                           07 Nov 2010


                                                                                                                                                        Share Price - Last 10 Years
     Investment Profile                                                                                                                   7

                                                                                                                                          6
     Executive Summary
                                                                                                                                          5
     Telecom Italia (TI) faces serious problems; EPS has declined since 2004, as both revenues & margins
                                                                                                                                          4
     have been under pressure. The fundamental problem is that revenues in the core Italian businesses




                                                                                                                                    EUR
     (both the fixed line and wireless) are in decline; and have collectively fallen by over 25% since 2004.                              3
     This has been due to negative industry trends of a maturing telecoms industry, intensifying competition,                             2
     falling barriers to entry, loss of pricing power, commoditisation of services & hostile regulation. In addition,                     1
     Investments in LATAM (Brazil and Argentina) have partially offset this decline; but growth there is slowing.
                                                                                                                                          0
     Most operating profits are used to pay taxes and interest on debts; leaving few profits for shareholders.




                                                                                                                                              2000

                                                                                                                                                     2001

                                                                                                                                                             2002

                                                                                                                                                                     2003

                                                                                                                                                                            2004

                                                                                                                                                                                   2005

                                                                                                                                                                                           2006

                                                                                                                                                                                                   2007

                                                                                                                                                                                                          2008

                                                                                                                                                                                                                 2009

                                                                                                                                                                                                                         2010
     As a value stock, TI's valuation rests on its high dividend yield. However, it has restricted ability to
     increase dividends payments given the already high pay-out ratios, and lack of EPS growth potential.                                        TELECOM ITALIA                                   S&P 500 (Rebased)
     Overall the outlook is poor and there are few reasons to expect a significant turnaround in fortunes at TI.
                                                                                                                                    Capital Structure                                       Per Share                    Total
                                                                                                                                                                                               (€)                      (€ Bn)
     Significant recent developments                                                                                                Share Price                                                   1.0
       - Q3 2010 results were poor. Overall revenues were broadly static; Italian revenues continued to shrink                       Number of Shares (bn)                                                       19.4
         while an appreciation of the Brazilian real boosted LATAM revenues. Margins were broadly unchanged.                         Market Capitalization                                                       20.2
         TIM continues to loose wireless market share in Italy and suffer from aggressive reductions of prices.                      Net (Debt) / Cash                                               -1.7       -32.6
                                                                                                                                     Minority Interests & Prefs                                       -           -
     SWOT Analysis                                                                                                                   Enterprise Value (EV)                                            2.7        52.8
                                                                                                                                     Net Debt / Market Cap.                                                     161%
     Strengths                                                                                                                       Main Shareholder:                                                   Telco 24.5%
     Telecom Italia's competitive advantages include: large size (economies of scale), strong brand, key assets                      Financial Results           2010                               2011e      2012e
     (eg. licenses and network) and a strong market position (#1 in fixed line & mobile in Italy).                                  y/e 31 Dec                 (€ Bn)                              (€ Bn)     (€ Bn)
     Exposure to mobile growth in Brazil and Argentina. Telecoms services provide strong recurring revenues.                         Sales                       27.5                                27.7        27.8
     Domestic operations (fixed line & wireless in Italy) remain profitable, with broadly stable EBITDA margins.                     EBIT                         5.7                                 5.9         6.0
                                                                                                                                     Net Income                   2.3                                 2.5         2.6
     Weaknesses                                                                                                                      Share Capital               26.5                                27.7        29.1
     TI's wireless revenues in Italy are declining.                                                                                  Total Assets                87.8                                89.0        90.5
       - Mobile subscribers are falling as the market is saturated and inactive subscribers are being de-activated.                  FCF                          4.3                                 3.5         3.5
       - TIM has lost wireless market share in Italy; from 60% 2000, to below 40% now.
       - The new 3G mobile license "3" launched in 2004, pressurised prices and market share.                                       Per Share Data                                 2010             2011e                2012e
       - Hostile regulation has pressurized prices (eg. restrictions of roaming, termination & inter-connect prices).               EPS                             (€)            0.12              0.13                 0.13
       - Wireless ARPUs are now stabilising; the growth in data revenues is offsetting falling voice revenues.                      DPS                             (€)            0.06              0.06                 0.06
     TI's fixed line revenues in Italy are declining.                                                                               Cash EPS                        (€)            0.22              0.18                 0.18
       - The number of (telephone) lines continues to fall; and the rate of broadband growth is falling.                            BV                              (€)            1.38              1.44                 1.51
       - This trend is due to fixed-mobile conversion and increasing competition from cable.
     TI Media and Olivetti continue to loose money and drag Group earnings down.                                                    Efficiency analysis                        2010                 2011e                2012e
     Slowing revenue growth pressurises margins and puts the focus on cost controls.                                                EBIT Margin                              20.7 %                21.4 %               21.4 %
       - Problem: It is not possible to generate long term earnings growth from cost cutting.                                       Net Profit Margin                         8.5%                   9.2%                 9.2%
     Telecom Italia is weighed down by a high gearing.                                                                              Asset Turnover                           31.3%                 31.1%                 30.7%
     TI has been through a number of internal reorganizations and changes in shareholders.                                          Net Gearing**                           331.2%                321.8%                311.5%
                                                                                                                                    ROE                                       8.8%                   9.2%                 8.8%
     Opportunities and potential catalysts
     A stabilisation of the domestic (Italian fixed line & mobile) revenues and market share from:                                  ** = Net Assets / Share Capital & Reserves
       - Higher data transmission (broadband) services eg. FTTH, IPTV & wireless broadband (4G / LTE).                              Growth analysis           2010      2011e   2012e
       - Bundling (eg. "quadruple play" services - fixed line, wireless, internet, TV).                                             Sales                    0.0 %      0.7 %   0.6 %
     Though, it is unclear exactly how this will be achieved.                                                                       EBIT                     3.3 %      4.3 %   0.6 %
                                                                                                                                    Net Income             47.3 %       8.8 %   1.0 %
     Threats & risks                                                                                                                EPS                    47.3 %       8.8 %   1.0 %
     Competition is increasing from within and outside the telecoms industry, as the market matures.                                DPS                        -        0.0 %   0.7 %
       - Operators are fighting to steal subscribers from each other, rather than fighting to win new subscribers.                  Valuation Multiples       2010      2011e   2012e
       - Increased competition from: aggressive new entrants (eg. 3), cable operators (due to industry                              EV / Sales                 1.9        1.9     1.9
         convergence), and competing technologies (VoIP & WiFi).                                                                    EV / EBIT*                 9.3        8.9     8.9
       - Wireless handset manufacturers are increasingly competing with the operators by selling services                           P / Sales                  0.7        0.7     0.7
         directly to subscribers (eg iPhone apps) & claiming a share of revenues (eg iPhone).                                       P / EBIT*                  3.6        3.4     3.4
     Telecoms services are being commoditised - as seen by prices and margins being pressurized.                                    PE*                        8.7        8.0     7.9
       - Value is shifting away from telecoms to the content delivered by the networks.                                             PEG                        0.2        0.9     -
       - Telecoms operators are becoming "dumb pipes" adding little value to the services.                                          P / BV                     0.8        0.7     0.7
       - There is little to differentiate telecoms companies apart from price.                                                      P / FCF                    4.7        5.7     5.7
       - Telecoms' equipment prices, quality and capacity are increasing faster than demand for                                     EV / Assets Value          0.6        0.6     0.6
         telecoms services, leading to airtime prices falling faster than usage (call volumes) increase.                            Dividend Yield           5.7 %      5.7 %   5.8 %
     Weak Italian economic recovery; historically telecoms growth has been closely tied to economic growth.                         Div. Pay-out Ratio     49.6 %      45.6 %  45.5 %
     Unclear intentions of the owners of the 24% equity stake in TI held by Telco (ie. Telefonica).                                 Net Debt / EBITDA          2.9        2.9     2.8
                                                                                                     TIM = Telecom Italia Mobile.   * = Excluding unusual & exceptional items
                     FTTH = Fibre to the Home                   IPTV = Internet TV          ARPU = Average Revenue Per User.        2011e, 2012e etc… = Consensus Estimates.
Page 1 of 5                                      CONFIDENTIAL               For illustration purposes only.                                                          Sources: Telecom Italia, Bloomberg
                                                                                                                                                          07 Nov 2010


                                                                            Background Information

                               2010 Revenues                                             2010 EBITDA
                               by Geography                                             by Geography

                                                                                                                                                   LATAM = Wireless Brazil and
                           LATAM                                                        LATAM
                                                                                         21%                                                                Telecom Argentina
                            30%

                                                                                                                                                    Domestic = Italian Wireless
                                                                                                                                                                    & Fixed Line
                                           Domestic
                                             70%                                                     Domestic
                                                                                                       79%
                                                                                                                                                   Charts are for the period YTD



        Business Description        Telecom Italia is the dominant, integrated Italian telecommunications company. The headquarters are in Rome.
                                    The company operates landline telephone services in Italy, as well as mobile phone services in Italy and Brazil.
                                    TI's strategy is to defend its domestic market share (which would be difficult to increase), expand in Brazil and Argentina,
                                    grow internet broadband & wireless data services, and reduce its cost base.
                                    Telefónica has significant influence over Telecom Italia via a 24% stake held with Mediobanca & Italian investors.
                                    It is possible that Telefonica will seek to acquire Telecom Italia eventually.

        Brief history                TI was founded in 1994 by the merger of several state-owned telecoms companies, when it was privatised.
                                     The Italian Government sold its remaining 33% stake in TI in 1997.
                                     Telecom Italia (TI) has been subject to numerous changes in ownership:
                                           -   Olivetti in 1998.
                                           -   Pirelli & Benetton in 2001.
                                           - Telefonica and Mediobanca in 2007.
24.5%                               In these activities, Telecom Italia is effectively controlled by a group holding a minority stake, and using large amounts of debt.

                                    TI has been subject to numerous internal reorganizations including the IPO of 40% of TIM (Telecom Italia Mobile) in 1995,
                                    and its subsequent de-listing in 2004.
                                    Divestments by TI: Entel Chile group (2005), the Finsiel group and Tim Hellas (2005), Tim Peru (2005), and Digitel Venezuela.
                                    In 2009, TI obtained 58% and control of Telecom Argentina, which has since been consolidated into the financial accounts.
                                    In 2010, TI's Sparkle (broadband unit) and Fastweb were investigated as part of a probe into alleged money-laundering.

        Management                   Franco Bernabè has been CEO since Dec 2007. Previously he was CEO of Eni (1992-8) & Telecom Italia (1998-9).
                                     Gabriele Galateri di Genola is Chairman.

        Telecom industry            Telecoms is a capital intensive, mature, highly regulated, oligopolistic & competitive industry with strong recurring revenues.
        overview                    Telecoms represents a relatively significant part of the economy (about 3%), and has the profile of a utility service. That is to say,
                                    telecoms provides a service that fulfils a strong human and business need (ie. communication), for consumes and enterprises.
                                    The telecoms industry boomed in the 1990's with the growth of mobile and data (internet) services. Growth has now slowed.
                                    Now almost everyone has a mobile phone and internet access (though penetration rates are lower in emerging countries).
                                    Growth has shifted from increasing numbers of new subscribers, to existing subscribers spending more on the services.

        Regulatory                  The EU regulatory environment is increasingly hostile; especially on roaming, termination and interconnect fees.
        environment:                The EU are contemplating the terms for "net neutrality"; by requiring telecoms operators to treat all internet traffic equally.
                                    This could be negative for Telecoms operators, as it means that they cannot discriminate against the bandwidth intensive websites;
                                    such as the YouTube video services.




        Key Divisions:     Description:


        Domestic Operations:
        Wireline Italy              The Fixed Line Division includes communications products and services to consumers and businesses for: voice services (local,
        (Fixed Line)                long distance & international), internet access, broadband video and data, next generation Internet protocol (IP) network services,
                                    network access, managed networking services (such as Virtual Private Networks), and wholesale / carrier services.
                                    The network includes last mile, local, metro, inter-city, long-distance (national & international), and the end-to-end "core" IP networks.
                                    TI also operates Sparkle, the wholesale broadband unit.

        Wireless Italy              Wirelesses' products and services include wireless voice and data (eg. SMS and internet), services and equipment sales.
        (Mobile)                    Wireless provides almost complete (100%) national network coverage and includes WiFi (wireless broadband) services.

        LATAM                       Telecom Italia operates fixed and mobile telecoms in LATAM through TIM Brazilian and (58% of) Telecom Argentina.
                                    TI's Brazilian wireless operator has a 24% market share (2nd largest). Brazil now has over 85% market penetration.

        Other                       TI also operates an Italian television company, Telecom Italia Media, and Olivetti (computer manufacturer).
                                    Other segment is also compromised of small, miscellaneous and corporate activities.


        Page 2 of 5        CONFIDENTIAL               For illustration purposes only.                                                           Sources: Telecom Italia, Bloomberg
                                                                                                                                                                                                                                                                                                                                               07 Nov 2010


                                                                                                                                        Market Data - Quarterly Since 2000

                                                 Italian Wireless Market Growth and Penetration                                                                                                                                                                                         Margins
                                      150                                                                                                                         150%                                                60%
                                                                                                                                                                                                                      50%
il and




                                                                                                                                                                         Growth / Penetration
entina                                100                                                                                                                         100%                                                40%
                    Subscribers (m)




                                                                                                                                                                                                                      30%
eless
                                          50                                                                                                                      50%                                                 20%
d Line
                                                                                                                                                                                                                      10%

                                           0                                                                                                                      0%                                                        0%




                                                                                                                                                                                                                                   2000

                                                                                                                                                                                                                                             2001

                                                                                                                                                                                                                                                            2002

                                                                                                                                                                                                                                                                          2003

                                                                                                                                                                                                                                                                                    2004

                                                                                                                                                                                                                                                                                                  2005

                                                                                                                                                                                                                                                                                                                 2006

                                                                                                                                                                                                                                                                                                                                2007

                                                                                                                                                                                                                                                                                                                                              2008

                                                                                                                                                                                                                                                                                                                                                             2009

                                                                                                                                                                                                                                                                                                                                                                            2010
YTD
                                                             2001
                                                   2000



                                                                        2002

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                                                                                                2004

                                                                                                         2005

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                                                                                                                        2007

                                                                                                                                 2008

                                                                                                                                          2009

                                                                                                                                                    2010
                                                                                                                                                                                                                    -10%

                                          -50                                                                                                                     -50%                                              -20%

                                                            Subscribers                                         Growth                              Penetration
                                                                                                                                                                                                                                    Net income Margin                                          EBITDA Margin                                            EBIT Margin



                                                                                                                                Financial Results - Quarterly Since 2000

                                                                                 Revenue and Growth                                                                                                                                                         Revenue Growth by Division
                      10                                                                                                                                           50%                                                 40%
                              8                                                                                                                                    40%
                                                                                                                                                                                                                       30%
                              6                                                                                                                                    30%
                                                                                                                                                                                                                       20%
         EUR (bn)




                                                                                                                                                                                Growth




                              4                                                                                                                                    20%
                                                                                                                                                                                                                       10%
                              2                                                                                                                                    10%

                              0                                                                                                                                    0%                                                       0%
                                                                                                                                                                                                                                              2001
                                                                                                                                                                                                                                   2000




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                                                     2001
                                          2000




                                                                 2002

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                                                                                             2004

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                                                                                                                                           2009

                                                                                                                                                      2010




                         -2                                                                                                                                        -10%                                              -10%

                         -4                                                                                                                                        -20%                                              -20%

                                          Domestic                              LATAM                           Other              Revenue                         Growth                                                                         Domestic                                                LATAM                                                      Total



                                                                                 EBIT & EBIT Margin                                                                                                                                                                        EBITDA by Division
                              2.5                                                                                                                                   50%                                                     4                                                                                                                                         80%

                              2.0                                                                                                                                   40%
                                                                                                                                                                                                                            3                                                                                                                                         60%




                                                                                                                                                                                                                                                                                                                                                                                     EBITDA Margin
           EUR (bn)




                              1.5                                                                                                                                   30%
                                                                                                                                                                                 Margin




                                                                                                                                                                                                                 EUR (bn)




                                                                                                                                                                                                                            2                                                                                                                                         40%
                              1.0                                                                                                                                   20%
                                                                                                                                                                                                                            1                                                                                                                                         20%
                              0.5                                                                                                                                   10%
                                                                                                                                                                                                                            0                                                                                                                                         0%
                                                                                                                                                                                                                                           2001
                                                                                                                                                                                                                                  2000




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                                                                                                                                                                                                                                                                                                                            2008

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                                                                                                                                                                                                                                                                                                                                                      2010




                              0.0                                                                                                                                   0%
                                             2000

                                                          2001

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                                                                                                                                            2009

                                                                                                                                                       2010




                                                                                                                                                                                                                            -1                                                                                                                                        -20%

                                                                                                                                                                                                                                         Domestic                                        LATAM                                                       Other
                                                                           EBIT                                                 EBIT Margin
                                                                                                                                                                                                                                         EBITDA                                          EBITDA Margin



                                                                                 Net Income Analysis                                                                                                                                                                                               EPS
                                      3                                                                                                                             3
                                                                                                                                                                                                                                 0.10
                                      2                                                                                                                             2

                                      1                                                                                                                             1
                                                                                                                                                                                                                                    -
             EUR (bn)




                                                                                                                                                                         EUR (bn)




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                                      0                                                                                                                             0
                                            2000

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                                                                                                                                             2009

                                                                                                                                                           2010




                                                                                                                                                                                                                     EUR




                                  -1                                                                                                                                -1                                                           -0.10

                                  -2                                                                                                                                -2

                                  -3                                                                                                                                -3                                                           -0.20
                                                    EBIT*                                                     Tax                                      Net Interest
                                                    Other                                                     Unusual                                  Net Income
                                                                                                                                                                                                                                 -0.30
         * = excludes unusual items.
         "Other" includes non-operating items and minority interests.
         "Unusual" includes one-off, exceptional and extraordinary items.
         Page 3 of 5                                                                                                           CONFIDENTIAL                                                     For illustration purposes only.                                                                                         Sources: Telecom Italia, Bloomberg
                                                                                                                                                                                                                                                                                                                                                                                                                   07 Nov 2010


                                                                                                                                             Additional Analysis - Quarterly Since 2000

                                          Domestic Operations (Italy) Results                                                                                                                                                                                                                                             Wireless Subscribers
                10                                                                                                                                                                                      50%                                                        80                                                                                                                                                                            40%

                 8                                                                                                                                                                                      40%                                                        60                                                                                                                                                                            30%




                                                                                                                                                                                                                                                Subscribers (m)
                 6                                                                                                                                                                                      30%
                                                                                                                                                                                                                                                                   40                                                                                                                                                                            20%
     EUR (bn)




                                                                                                                                                                                                                    Growth




                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Growth
                 4                                                                                                                                                                                      20%
                                                                                                                                                                                                                                                                   20                                                                                                                                                                            10%
                 2                                                                                                                                                                                      10%
                                                                                                                                                                                                                                                                       0                                                                                                                                                                         0%
                 0                                                                                                                                                                                      0%




                                                                                                                                                                                                                                                                                       2001
                                                                                                                                                                                                                                                                              2000




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                      2000

                                 2001

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                                                                                                                                                                         2009

                                                                                                                                                                                  2010
                -2                                                                                                                                                                                      -10%                                                      -20                                                                                                                                                                            -10%

                -4                                                                                                                                                                                      -20%                                                      -40                                                                                                                                                                            -20%
                            Fixed Line                                                                Wireless                                                                  Inter-Segment                                                                                          LATAM                                                     Italy                                 Subscriber Growth - Italy
                            Growth                                                                    EBITDA Margin                                                                                                                     Note: Certain LATAM wireless operations were sold in 2004-5.


                                                                   Wireless Market Share - Italy                                                                                                                                                                                                                         Wireless ARPU - Italy
             60%                                                                                                                                                                                                                                                  40                                                                                                                                                                               40%
             50%
                                                                                                                                                                                                                                                                  30                                                                                                                                                                               30%


                                                                                                                                                                                                                                         EUR (per month)
             40%




                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Growth / Data %
                                                                                                                                                                                                                                                                  20                                                                                                                                                                               20%
             30%
             20%                                                                                                                                                                                                                                                  10                                                                                                                                                                               10%

             10%                                                                                                                                                                                                                                                       0                                                                                                                                                                           0%

                                                                                                                                                                                                                                                                                       2001
                                                                                                                                                                                                                                                                              2000




                                                                                                                                                                                                                                                                                                              2002

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                                                                                                                                                                                                                                                                                                                                                   2005

                                                                                                                                                                                                                                                                                                                                                             2006

                                                                                                                                                                                                                                                                                                                                                                                2007

                                                                                                                                                                                                                                                                                                                                                                                          2008

                                                                                                                                                                                                                                                                                                                                                                                                                    2009

                                                                                                                                                                                                                                                                                                                                                                                                                                  2010
                0%
                                                                                                                                                                                                                                                                  -10                                                                                                                                                                              -10%
                         2000

                                   2001

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                                                                                                                                                                         2008

                                                                                                                                                                                   2009

                                                                                                                                                                                                             2010




                                                                                                                                                                                                                                                                  -20                                                                                                                                                                              -20%
                                TIM                                              Vodafone                                             Wind                                       Blu                                   3
                                                                                                                                              TIM = Telecom Italia Mobile                                                                                                            Voice                                     Data                                             Growth                                               Data %



                                                                                                                                Free Cash Flow Analysis - Quarterly Since 2000

                                                                     Free Cash Flow Analysis                                                                                                                                                                                                                          Free Cash Flow Breakdown
             2.5                                                                                                                                                                                                                                                  3                                                                                                                                                                                             3

             2.0                                                                                                                                                                                   40%                                                            2                                                                                                                                                                                             2

             1.5
                                                                                                                                                                                                                                             EUR (bn)




                                                                                                                                                                                                                                                                                                                                                                                                                                                                          EUR (bn)
                                                                                                                                                                                                                                                                  1                                                                                                                                                                                             1
EUR (bn)




             1.0                                                                                                                                                                                   20%
                                                                                                                                                                                                                    Growth




                                                                                                                                                                                                                                                                  0                                                                                                                                                                                             0
             0.5
                                                                                                                                                                                                                                                                                     2001
                                                                                                                                                                                                                                                                           2000




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                                                                                                                                                                                                                                                                  -1                                                                                                                                                                                            -1
             0.0                                                                                                                                                                                   0%
                     2000

                                2001

                                                            2002

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                                                                                       2004

                                                                                                     2005

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             -0.5                                                                                                                                                                                                                                                 -2                                                                                                                                                                                            -2

             -1.0                                                                                                                                                                                  -20%                                                                           Net income                                                      Net CAPEX                                                                Other
                    FCF                                                                                       FCF Growth (12m moving av.)                                                                                                                                         Working Capital                                                 -
Data not available prior to 2004.                                                                                                                                                                                                        Data not available prior to 2004.                                                                                  Net CAPEX = Depreciation - CAPEX


                                                                                                                                                                                        Balance Sheet Analysis

                                                                           2010 Assets by Type                                                                                                                                                                                       2010 Liabilities & Share Capital by Type
                    60                                                                                                                                                                                                                                                      40

                                                                                                                                                                                                                                                                            35
                    50
                                                                                                                                                                                                                                                                            30
                    40
  EUR (bn)




                                                                                                                                                                                                                                                                            25
                                                                                                                                                                                          Other current assets




                                                                                                                                                                                                                                                                                                                                                                                                  Long Term Liabilities
                                                                                                                                                                                                                                                 EUR (bn)
                                                                                                                Cash & Equivalents




                                                                                                                                                                                                                                                                                                                                                                                                                                           Capital & Reserves
                                       Intangibles Assets




                                                                                                                                                                                                                                                                                              Current Liabilities




                    30                                                                                                                                                                                                                                                      20
                                                                                                                                                       Working Capital




                                                                                                                                                                                                                                                                                                                               Short Term Debt




                                                                                                                                                                                                                                                                                                                                                               Long Term Debt
                                                                                  Tangible Fixed




                                                                                                                                                                                                                                                                            15
                                                                                     Assets




                    20
                                                                                                                                                                                                                                                                            10
                    10
                                                                                                                                                                                                                                                                              5
                     0                                                                                                                                                                                                                                                        0

Intangible assets mostly comprises goodwill from acquisitions.
Page 4 of 5                                                                                                                                  CONFIDENTIAL                                                                For illustration purposes only.                                                                                                                         Sources: Telecom Italia, Bloomberg
                                                                                                                                                                      07 Nov 2010


                                                                                   Quarterly Accounts

      (€ m)     y/e 31 Dec
      Profit & Loss                                            2008                                             2009                                     2010
                                                                 Q1           Q2          Q3            Q4        Q1       Q2         Q3        Q4         Q1        Q2           Q3        Q4

      Revenues                                                 7,373      7,025        7,337          7,601     6,581    6,979      6,812     7,073      6,536     6,791        6,732
       Revenue Growth                                         -2.3%    -11.7%         -5.3%          -7.0%    -10.7%    -0.7%      -7.2%     -6.9%      -0.7%     -2.7%        -1.2%
      Gross Margins                                           59.4%     58.0%         58.1%          54.1%     61.6%    59.1%      61.1%     58.3%      62.7%     59.6%        60.9%
      EBIT                                                    1,505      1,063        1,579          1,290     1,354    1,331      1,608     1,200      1,408     1,473        1,423
       EBIT Margin                                            20.4%     15.1%         21.5%          17.0%     20.6%    19.1%      23.6%     17.0%      21.5%     21.7%        21.1%
       Tax Charge                                               42% n.a.                42%            25%       43%      38%        30%       23%        37%       34%          25%
      Net Income                                                485        632          626            434       460      504        201       416        601       610          608
       Net Income Margin                                      6.6 %      9.0 %        8.5 %          5.7 %      7.0 %   7.2 %      3.0 %     5.9 %      9.2 %     9.0 %        9.0 %
      EPS          (€)                                         0.02       0.03         0.03           0.02       0.02    0.03       0.01      0.02       0.03      0.03         0.03


                                                                                   Annual Accounts

      (€ Bn)    y/e 31 Dec                                                                                                                                                 Consensus Estimates
      Profit & Loss                                            2001        2002        2003           2004     2005      2006       2007      2008       2009     2010e       2011e      2012e
      Revenues                                                  32.5        31.9        31.2           29.2     30.6      31.9       31.4      29.3       27.4      27.5        27.7       27.8
       Revenue Growth                                         12.7%       -1.8%       -2.2%          -6.3%     4.7%      4.2%      -1.4%     -6.6%      -6.4%      0.0%        0.7%       0.6%
      EBIT                                                      -0.2        -0.2         5.6            7.6     7.5       7.4         6.0       5.4        5.5      5.7          5.9       6.0
       EBIT Margin                                            21.2%       24.0%       25.3%          33.1%    28.6%     27.9%      26.2%     24.0%      26.2%     20.7%       21.4%      21.4%
       Tax Charge                                                n.a.       88%         29%            47%     43%       46%         39%       23%        34%      32%          30%       30%
      Net Income                                                -3.1        -0.8         1.2            1.8     3.2       3.0         2.4       2.2        1.6      2.3          2.5       2.6
       Net Income Margin                                      -9.5%       -2.4%        3.8%           6.2%    10.5%      9.5%       7.8%      7.4%       5.8%      8.5%        9.2%       9.2%
      EPS         (€)                                         -0.42       -0.09        0.07           0.11     0.18      0.16       0.13      0.11       0.08      0.12        0.13       0.13
      DPS         (€)                                          0.00        0.00        0.12           0.12     0.15      0.15       0.09      0.06       0.06      0.06        0.06       0.06

      Balance Sheet                                            2001        2002         2003          2004      2005     2006       2007       2008      2009     2010e        2011e     2012e
      Intangible & Goodwill Assets                             39.1        34.3         33.8          34.2      50.8     50.5       51.4       50.4      49.9      49.9         49.9      49.9
      Tangible Fixed Assets                                    30.0        23.6         20.8          26.0      24.0     21.0       19.3       20.6      18.6      17.5         16.6      15.6
      Current Assets                                           25.2        25.5         25.9          21.6      21.2     18.0       16.7       14.7      17.7      20.3         22.6      25.0
      Total Assets                                             94.2        83.4         80.5          81.8      96.0     89.5       87.4       85.7      86.2      87.8         89.0      90.5
      Current Liabilities                                      15.2        14.6         13.6          15.3      12.9     12.0       13.1       12.7      12.3      13.3         13.4      13.5
      Long term Liabilities                                    58.2        51.1         40.8          47.7      47.9     46.0       42.3       41.1      41.0      41.0         41.0      41.0
      Total Liabilities                                        81.5        71.7         64.4          65.6      70.3     63.4       62.0       60.1      60.2      61.3         61.4      61.4
      Share Capital & Reserves                                 12.7        11.6         16.1          16.2      25.7     26.0       25.4       25.6      26.0      26.5         27.7      29.1
      Total Liabilities & Reserves                             94.2        83.4         80.5          81.8      96.0     89.5       87.4       85.7      86.2      87.8         89.0      90.5

      Cash Flow                                                 2001       2002         2003          2004      2005     2006       2007       2008      2009     2010e        2011e     2012e
      Op FCF                                                     5.3        8.7          9.2          10.2       9.8      9.2        8.8        8.2       5.5       8.6          7.8       7.8
      Investing                                                -10.1       -0.1         -8.2          -5.0     -17.4     -4.2       -4.4       -6.7      -4.6      -4.3         -4.3      -4.3
      Financing                                                  2.2       -3.6         -1.0          -1.7       8.8     -8.0       -5.2       -2.4      -0.9      -1.2         -1.2      -1.2
      Cash Flow                                                 -2.6        5.0          0.1           3.5       1.3     -3.0       -0.8       -1.0       0.3       3.2          2.4       2.4
      FCF                                                       -3.2        8.7          9.2           5.2       4.6      4.1        3.5        3.2       1.0       4.3          3.5       3.5

      Notes - Unusual or significant items
          1) Most unusual items 2000-4, relate to exceptional one-off charges and asset write-downs arising from acquisitions, restructurings or wireless licences.
          2) Seat Pagine Gialle was deconsolidated 2003

PEX

      Indigo Equity Research determined what constituted "Unusual items" in this report.                                                                              FCF = Free Cash Flow
                                                                                                                                 EBIT = Earnings Before Interest & Tax (ie. Operating Income)
      Copyright © 2011 Indigo Equity Research Limited                                                                                           2011e, 2012e etc… = Consensus Estimates.
      Explanation of Company Ratings: Ratings are subjective. Risk, = Risk of earnings disappointment or volatility. Quality, = Quality of the company based on
      criteria such as management, market position, pricing power, market growth, quality of services etc….. Valuation = Absolute measure of valuation multiples.
      Typically the good quality & high growth companies have high valuations; and the low quality & low growth companies have low valuations.
      Disclaimer and important information: This document has been prepared by Indigo Equity Research Limited for information and illustration purposes only. This document
      is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. This document does not contain an investment recommendation and is
      not a complete or comprehensive description of a company. Any projections, forecasts or estimates of potential risk or return or financial results are only illustrative and should
      not be taken as limitations of the maximum possible loss or gain. The information is provided in this document at the date of preparation and is subject to change. While this
      information has been obtained from sources believed to be reliable, we do not represent that it is accurate or complete and should not be relied on as such. Indigo Equity
      Research Limited, its directors and employees, can accept no liability or responsibility for any direct, indirect or consequential loss arising from use of this document or its
      contents. Past performance is no indication of future results. Real results may vary from forecasts. Historic price performance may be presented in a currency other than the
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      Page 5 of 5                    CONFIDENTIAL                  For illustration purposes only.                                                          Sources: Telecom Italia, Bloomberg

				
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