Analisi Telecom Italia

ITALY
Please see important disclosures at the end of this document

2 February 2012
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www.cheuvreux.com
INTEGRATED TELECOM SERVICES
COMPANY UPDATE
Telecom Italia

Rating 3/Underperform
Target price (6 months) -12.9% EUR0.69
Price (01/02/2012) EUR0.792
Reuters: TLIT.MI Bloomberg: TIT IM

Caught between a rock and a hard place
Pressure from the credit rating agencies points to significant
downside on TI's DPS. We judge any eventual DPS cut as a good
move; however its magnitude will probably be insufficient to
achieve any material deleverage over the next 3-years as TI's DPS
has to match its controlling shareholder's financing needs. The
2012E guidance (due by March) might trigger disappointment vs.
current market expectations. We cut our DPS by ~20% to
EUR0.045, new TP is EUR0.69 (prev. EUR0.77).

Credit rating agencies: the rock
As expected ("Southern discomfort", 13-01-2012), pressure from the
rating agencies pushed TI to prioritise deleverage, pointing to clear
downside risk on the DPS. Any eventual DPS cut would be positive,
however we believe its magnitude will probably be insufficient, as the
only way to accelerate deleverage would be a 3-year zero DPS policy.

Controlling shareholder's cash needs: the hard place
This scenario (zero dividend) is very unlikely though, as TI's DPS must
match the financing needs of its controlling shareholder. We expect
Telco debt to be refinanced with a 12/24 months bridge loan and a
cost in the 4.0-4.5% range. The minimum level for TI ordinary DPS to
cover Telco's interest costs would be in the EUR0.043/0.048 range.
We set our new 2011-13E DPS forecast mid-way, at EUR0.045.

A profit warning the next step?
2012E guidance (due by end of March) is likely to represent the next
negative catalyst. The weakening of the macro outlook (in Italy and
Brazil), coupled with the recent operating trends and management
comments point to risk of disappointment vs. market expectations.

Negative stance confirmed New TP at EUR0.69
We reiterate our 3/Underperform rating and cut our target price to
EUR0.69 (EUR0.77), to factor in a higher earnings downside risk. The
stock is trading at a double-digit discount vs. the avg. of the sector.

Giovanni MONTALTI, CFA
Research Analyst
gmontalti@cheuvreux.com
(44) 207 621 5184
Stock data
Market capitalisation EUR10619m
Free float EUR7709m
Enterprise value EUR49527m
No. of shares, adjusted 19434m
Daily volume EUR51.67m

Performances
1 month 3 months 12 months
Absolute perf. -4.7% -7.4% -25.7%
Relative perf. -12.2% -15.0% -0.2%

0.7
1.2
1.7
2.2
2.7
3.2
12/02 02/04 04/05 05/06 07/07 08/08 10/09 12/10 01/12
0.7
1.2
1.7
2.2
2.7
3.2
Price/FTSE ITALIA ALL-SHARE INDEX Price

Next Event
23rd February: preliminary FY-2011 results

Sector focus
Sector Top Picks Deutsche Telekom, Telenor,
Teliasonera
Least favoured Telecom Italia, Telefonica

Shareholders
Free Float 72.6%, Telco 22.4%, Findim 5.0%

To 31/12 (EUR) 2010 2011E 2012E 2013E
Sales (m) 27572.0 29887.0 30118.0 29844.0
EBITDA (m) 11412.0 12209.0 12164.0 12014.0
EBITA (m) 5865.0 6660.0 6572.0 6401.0
Net att. profit, rest. (m) 3080.0 2536.0 2471.0 2445.0
Free cash flow (m) 3147.0 2658.0 3057.0 3326.0
Clean EPS 0.16 0.13 0.13 0.13
Net dividend 0.06 0.05 0.05 0.05
2010 2011E 2012E 2013E
P/E (x) 6.0 6.3 6.2 6.2
EV/EBITDA (x) 4.2 3.9 4.1 3.9
Attrib. FCF yield (%) 22.8 19.5 16.9 18.4
Net debt/EBITDA (x) 2.8 2.5 2.4 2.2
Yield (%) 6.0 5.4 5.7 5.7
ROCE (%) 8.8 10.4 10.4 10.2
EV/Capital empl. (x) 0.7 0.8 0.8 0.8

Company profile

Integrated operator in the Italian market
Telecom Italia (TI) is the former State-owned incumbent. In the Italian
market, the group is active in both fixed (~67% subscriber market
share on traditional fixed access) and mobile (33% subscriber
market share) telecommunications and it controls a 77.7% stake in
Telecom Italia Media, a small TV broadcaster.

Limited international exposure
Over the past few years, the company has steadily reduced its
international footprint, selling assets in Austria, Spain, Chile, Peru,
Venezuela, Brazil (fixed business), Greece, Turkey, France, Germany,
Netherlands and Cuba. Now, it is focusing on its mobile subsidiary in
Brazil (~66.7% controlled, 12.4% of group EBITDA net of minorities).

Declining EBITDA trend and high leverage
TI's fundamental picture has been characterised by a long-lasting
EBITDA decline triggered by a struggling domestic unit (3-year
CAGR -3.3%), combined with a high leverage (Net debt/EBITDA net
of minorities 2.9x at end 2011E) and a high dividend payout (83%
avg. payout on group net profit over 2003-2010). EBITDA
breakdown: domestic business (fixed-line and mobile) 85%; mobile
Brazil 12%.

Complex shareholding structure
TI is currently controlled by Telco, a holding company that owns
22.4% of the ordinary share capital. Telco is controlled by a
shareholders' pact binding Telefonica (46.2%) and a group of Italian
financial investors: Intensa-Sanpaolo (11.6%), Mediobanca (11.6%)
and Generali (30.6%).

SWOT analysis
Strengths Weaknesses
Leader in the domestic market
Brazilian mobile exposure
Control of the only fixed
access network in Italy
High profitability level

High exposure to a mature,
saturated market
High financial leverage
Ineffective capital allocation
strategy
Complex shareholding
structure

Opportunities Threats
Further cost-cutting
Development of mobile BB and
ICT
Fixed broadband business
in Brazil(TIM Fiber)
In-market consolidation in
Italy

Further macro outlook
deterioration
Credit rating downgrade
Capex/sales ratio increase
Operation/ownership
separation of the fixed access
network

Valuation
We cut our target price to EU0.69 versus
EUR0.77 previously. Our valuation is based on a
sum-of-the-parts model, underpinned by a DCF
for the main business units (domestic fixed,
domestic mobile, TIM Brasil) and based on other
methodologies for the minor business units.
We assumed an average WACC of 8.5% for the
domestic units and an average WACC of 8.9%
for the Brazilian unit. For the growth rate to
perpetuity, we assumed: -3.5% for the domestic
fixed-line, -1.0% for the domestic mobile and
2.5% for TIM Brasil. EV/(EBITDA-Capex) exit
multiples range from 5.9x for the domestic fixed
unit to 8.6x for TIM Brasil.
The stock is trading at a double-digit discount to
the average of European comparables on a
2011-2012E EV/EBITDA multiples at 3.9x and
4.1x.

Investment case
Pressure from the rating agencies points to
significant downside on TI's DPS. We judge any
eventual DPS cut as a good move, however its
magnitude will probably be insufficient for the
company to achieve any material deleverage
over the next 3-years. Indeed, TI's DPS must
match the financing needs of its controlling
shareholder, Telco.
On the back of recent management comments
(pointing to the need to prioritise deleverage)
and on the back of our analysis relative to Telco
re-financing, we cut our DPS by around 20% to
EUR0.045 (vs. previously EUR0.058).
The 2012E guidance (due by end of March) is
likely to represent the next negative catalyst. The
weakening of the macro outlook (in Italy and
Brazil), coupled with the recent operating trends
and management comments point to risk of
disappointment vs. market expectations.
We reiterate our 3/Underperform rating on the
stock. Our new target price at EUR0.69 vs.
previously EUR0.77 factors in downside risk on
earnings. The stock is trading at a double-digit
discount to the average of the European telecom
sector.

2 February 2012 ITALY Telecom Italia

www.cheuvreux.com

2

CONTENTS
I Rating agencies: the rock 4
The time to close the wallet has finally come 4

II Controlling shareholder's needs: hard place 11
III A profit warning the next step? 15
IV New TP to EUR0.69 19
Market multiples 20
Cheuvreux tool kit
Technical analysis 22
Environmental, social & governance issues 23

CHEUVREUX'S TELECOM TEAM
Peter Kurt Nielsen (coord.) UK (44)-207-621 51 81 ( Direct ) pnielsen@cheuvreux.com
Giovanni Montalti UK (44)-207-621 5184 ( Direct ) gmontalti@cheuvreux.com


www.cheuvreux.com

3

I Rating agencies: the rock
As expected (see "Southern discomfort", 13-01-2012), the pressure from the rating
agencies pushed TI to prioritise deleverage, pointing to clear downside risk on the DPS.
Any eventual DPS cut would be a good move, long term. However we believe its
magnitude will probably be insufficient, as the only way to accelerate deleverage
materially would be a 3-year zero DPS policy. We cut our 2011-13E ordinary DPS by 22%
to EUR0.045.

The time to close the wallet has finally come
At its last meeting (19th January) TI board "did express its orientation, with a view to
protecting the company and its shareholders, towards giving absolute priority to
deleveraging and to maintenance of the rating, especially in the light of the recent
downgrade of Italy's creditworthiness"'. The management only communicated such a
decision on 24th January, following some Italian press reports pointing to TI's intention to
cut the cash-out for dividends in 2012E to EUR0.9bn (vs. the EUR1.2bn in 2011). However
management reiterated that the final decision on the 2011E DPS (to be paid in 2012E) will
be taken at the same time as the board approves FY-2011E results (preliminary
statements approval on the 23rd February, financial statements approval on the 29th
March).
Should the scenario prompted by the press reports prove true (dividend cash-out for
2012E down to EUR0.9bn) this would imply 2011E DPS at EUR0.043 for the ordinaries (-
26% vs. the EUR0.058 for 2010 DPS) and EUR0.054 for the savings (-22% for the
EUR0.069 for 2010 DPS). This would correspond to a 36% downside vs. the EUR0.067 of
ordinary DPS implied by the company guidance (provided in February 2011) and a 31%
downside vs the EUR0.078 savings DPS implied by company guidance.
We see three main triggers behind TI management's availability to reassess the dividend
policy:

Strong pressure from the credit rating agencies. This is obviously the most
relevant and the most obvious driver (explicitly indicated by the management).
However, it results from the somewhat predictable combination of some recent
elements external to the company (the credit downgrade of Italian sovereign debt,
the deterioration of the macro outlook) and to some structural ones, long-lasting and
company specific (poor earnings growth, excessive financial leverage);

Deterioration of the earnings outlook. This obviously stems from the material
downward revision of the macro outlook for Italy but it is also the result of the poor
diversification of TI's asset mix, of the poor structural trends affecting the domestic
fixed business and of the struggling domestic mobile business whose repeatedly
announced turnaround seems very far from being achieved;

Excessive financial leverage. This stems from the structural ineffectiveness of the
company's capital allocation strategy, which is too leveraged on unaffordable levels
of shareholder remuneration. As we have written many times in recent years, this has
been the main drag of TI's equity story since its privatisation: a capital allocation
strategy tailored to the financing needs of very stretched controlling shareholders and
not on the company's medium/long-term industrial goals (see chapter II for more
details).
TI to focus on
deleveraging and
maintaining its credit
rating
Italian press reports
point to a 2011E DPS
at EUR0.043
Triggers for a dividend
cut

www.cheuvreux.com

4

TELECOM ITALIA 2011-2013E DPS: CA CHEUVREUX FORECAST REVISION
(EUR) 2011E 2012E 2013E
Old New Chg Old New Chg Old New Chg
DPS ordinaries
0.058 0.045 -22% 0.058 0.045 -22% 0.058 0.045 -22%
DPS savings
0.069 0.056 -19% 0.069 0.056 -19% 0.069 0.056 -19%
Source: CA Cheuvreux
On the back of the management comments and considering the operational and macro
headwinds facing the company we cut our 2011-2013E DPS forecast to EUR0.045 for the
ordinaries (vs. previously EUR0.058) and to EUR0.056 for the savings (vs. previously
EUR0.069), implying a 22% and 19% respective downside vs. our previous forecast that
was already materially below company guidance and consensus.
TELECOM ITALIA 2011-2013E DPS: CA CHEUVREUX NEW FORECAST VS
CONSENSUS
(EUR) 2011E 2012E 2013E
Mkt Cheux Chg Mkt Cheux Chg Mkt Cheux Chg
DPS ordinaries 0.063 0.045 -29% 0.071 0.045 -37% 0.079 0.045 -43%
DPS savings 0.074 0.056 -24% 0.082 0.056 -32% 0.090 0.056 -38%
What are the triggers for a potential DPS cut?
We look in more depth at the main triggers that would justify, in our view, a DPS cut. The
bottom line here is that we find strong grounds for this. Obviously the timing and the
urgency of the cut is immediately linked with the recent deterioration of the macro picture
and the resulting pressure of the rating agencies. However, we highlight how the need to
reduce the shareholder remuneration is closely linked with the structural weaknesses of TI
(poor earnings trend and excessive financial leverage) and with its ineffective capital
allocation strategy.
Trigger 1): pressure from credit rating agencies
All major credit rating agencies had cut their outlook on TI's credit worthiness to negative
by the end of Q3-2011, considering the poor earnings outlook and the high level of
financial leverage: Standard & Poor's BBB negative, Moody's Baa2 negative, Fitch BBB
negative.
NET DEBT/EBITDA RATIO FORMER EUROPEAN INCUMBENTS (2011E)
2.8
2.6
2.4 2.4
2.0
1.6
0
0.5
1
1.5
2
2.5
3
Deutsche
Telekom
Telecom Italia Telefonica KPN France Telecom Teliasonera
Indeed, according to our estimates, by the end of 2011E TI should have a net
debt/EBITDA ratio at 2.55x, at the high-end of the European telecom sector. Adjusted for
the minorities (mainly TIM Brasil and Telecom Argentina) this grows to 2.9x, at the very
high-end of the range of the former European incumbents.
1st trigger: pressure
from credit rating
agencies
We slash our 2011E
ordinary DPS by ~20%
to EUR0.045

www.cheuvreux.com

5

TI NET DEBT/EBITDA RATIO 2011E: CONSOLIDATED VS. ADJUSTED FOR MINORITIES
2.6
2.9
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
1
Net debt/EBITDA ratio Net Debt/EBITDA ratio net of minorities
The recent downgrade of the Italian sovereign credit rating coupled with the expected
weakening of the domestic telecom market (triggered by the deterioration of the macro
outlook and the recently announced austerity measures) have probably pushed the rating
agencies to warn TI about the urgent need to move to a more conservative dividend
policy. TI management's recent indications about its intention to prioritise de-leverage and
maintenance of the rating seem very reasonable in this context and will probably lead to a
significant cut vs. the DPS levels that were implied by company guidance and market
expectations. As a matter of fact the company cannot afford a credit rating downgrade: it
might trigger a non-investible status of TI bonds for some investors and a significant
higher funding cost. This is particularly valid in the current context of capital market
turmoil and considering the significant chunk of debt maturities the company faces over
the next 3-years. In this light we point out how the company's ability to stay out of the
capital markets is materially lower (shorter) then what is theoretically indicated by its
liquidity margin. There are two main elements to consider here:

Notwithstanding the good liquidity margin, a company in TI's position (excessive
financial leverage, significant maturities short-term), facing a lack of visibility on the
next opportunity to raise funds (corporate bond market has remained closed for a
long time), is forced to chase the first available window of opportunity, even
accepting very penalising conditions. A clear example is the attitude followed by TI
over the last few years and particularly in the most critical phases of the crisis. In
October 2011, once the corporate bond market re-opened, TI issued EUR1bn bond
in 2 different tranches recognising to investors an average yield of 7%,
corresponding to 150bp in excess of the average cost of debt reported at the end of
Q3-2011 (5.5%). Going further back, in Q1-2009, following Lehman collapse, at the
first window of opportunity TI placed around EUR2bn in the market (EUR0.5bn
private placement; EUR1.5bn bond in the market) with an average yield at around
8%.

In a potential scenario of credit crunch (which unfortunately cannot be ruled-out in
the current context) the company's ability to stay out of the capital markets would be
more realistically represented by the only liquidity position available (cash
instruments actually available in company cash balance) rather than by the undrawn
committed lines that might not be available in such a scenario. As a result, in a credit
crunch scenario TI's ability to stay out of the capital markets would be reduced down
to around 1 year (vs. the 2.7 years implied by the liquidity margin).

www.cheuvreux.com

6

TELECOM ITALIA 2012-2014E DEBT MATURITIES TELECOM ITALIA LIQUIDITY MARGIN
(EURm)
2012E
4 054
2013E
4 937
2014E
5 436
Avg yearly maturity over 2012-2013E
4 809
Cum 2012-2014E maturities
14 427

(EURm)
Liquidity position
5 160
Undrawn committed lines
7 830
Liquidity Margin
12 990
Liquidity margin/Avg yearly 2012-2014E maturities
2.7x
Liquidity position/Avg yearly 2012-2014E maturities
1.1x

Source: CA Cheuvreux; Company data Source: CA Cheuvreux
Trigger 2): deterioration of the earnings outlook
The downgrade of the GDP outlook for Italy and the recently announced austerity
measures will probably imply a deterioration of the private consumption levels, putting
additional pressure on telecom operators' top line as well. This element has obviously
been crucial in raising the concerns of the rating agencies. However, we want to highlight
how the poor earnings outlook does not stem from macro elements alone. We would
rather argue a cyclical element is coupling with TI's structural weaknesses. Its earnings
outlook is indeed affected by the poor diversification of its asset mix (85% of group
EBITDA from the mature and saturated Italian market) and by the structural downward
trend affecting the domestic unit. Particularly in the mobile business, the long announced
turnaround seems far from being achieved as price pressure continues and growth in
consumption levels is slowing down. As for TIM Brasil, the group's only growth engine, we
highlight how the macro slowdown in Brazil makes current market expectations look quite
challenging.
Trigger 3): excessive financial leverage
We have long argued that TI's capital allocation strategy has been ineffective over the last
ten years, being too leveraged on shareholder remuneration and too little on de-
leveraging. As such, instead of addressing TI's excessive leverage it was aggravating it.
While the new controlling structure has somehow reduced the pressure on TI cash-flows
compared to the previous one (ruled by Pirelli), we note the net debt/EBITDA ratio
adjusted for minorities expected at the end of 2011E at 2.9x is broadly in line with the one
reported at the end of 2007 (year of the change of control at TI) at 3.0x. Basically, the
announced de-leverage target has never been met and the dividend policy announced in
February 2011
1
was perfectly shaped to perpetuate such a poor trend as it was far
beyond what the company could afford since the moment it was announced (please see
our note "Q1: a wake-up call for the market" published 21/04/2011).
TELECOM ITALIA: 2011-2012E SHAREHOLDER REMUNERATION POLICY
(ANNOUNCED FEBRUARY 2011)
(EUR) 2011E 2012E 2013E
DPS ordinaries 0.067 0.077 NA
DPS savings 0.078 0.088 NA
Such a dividend policy would indeed leave TI over the next 3-years with very little room to
deleverage and very limited operational and strategic flexibility in a capital-intensive
industry such as telecoms.

1
Management announced a 3-year dividend policy covering the 2010-12E horizon and targeting a 15% annual DPS increase. This would imply the
2011E DPS at EUR0,067 (i.e. +15% vs the EUR0,058 paid on 2010 earnings) and the 2012E DPS at EUR0,077. In addition, the TI board has
requested and obtained AGM approval for a EUR800m savings share buyback.
2nd trigger:
deterioration of the
earnings outlook
3rd trigger: excessive
financial leverage, due
to the structural
ineffectiveness of
capital allocation
strategy

www.cheuvreux.com

7

To support our view and provide the relevant quantitative elements we highlight here the
de-leverage profile the company could afford should it decide to stick to the dividend
policy announced in February 2011. In this context, we do not factor in any buyback of
the savings shares (announced in February 2011 together with the new DPS policy), which
we think highly unlikely.
TELECOM ITALIA 2011-2016E SHAREHOLDER REMUNERATION: 'GUIDANCE SCENARIO'
2011E 2012E 2013E 2014E 2015E 2016E
DPS ordinaries
EUR/share
0.067 0.077 0.077 0.077 0.077 0.077
DPS savings
EUR/share
0.078 0.088 0.088 0.088 0.088 0.088
Dividends cash-out
EUR m
1 183 1 361 1 554 1 554 1 554 1 554
According to our analysis, in this scenario, notwithstanding a high dividend cover, the
company would not be able to reach a net debt/EBITDA ratio adjusted for minorities at
2.5x before 2015E. Note that our estimates do not include any cash-out for the upcoming
4G auction in Brazil and the related investments.
TELECOM ITALIA 2011-2016E: FINANCIAL LEVERAGE (LEFT AXIS)
AND SHAREHOLDER REMUNERATION COVER (RIGHT AXIS)
'GUIDANCE SCENARIO'
3.0
2.9
2.8
2.7
2.6
2.5
2.4
2.8
2.5
2.4
2.3
2.2
2.1
2.0
3.4
1.4
1.7
1.7 1.5
1.5
1.6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011E 2012E 2013E 2014E 2015E 2016E
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Net debt/EBITDA net of minorities Net debt/EBITDA FCFE/Shareholder remuneration cash-out
The only way for TI to reach a material deleverage over the next 2-3 years would be a
zero dividend policy
2
. Such a scenario is very unlikely as TI's controlling shareholder,
Telco, needs TI dividends to pay at least the interest on its own debt (around EUR3.2bn at
end of April 2011). However, in our view, this would be the best alternative for TI as its
high exposure to the struggling domestic market (82% of operating CF) and the risk of
growing investments (4G licence in Brazil, fibre in Italy) coupled with some slowdown risk
at TIM Brasil make financial deleverage the top priority. Once addressed, TI would recover
a minimum level of operational and strategic flexibility it has always lacked in recent years.
TELECOM ITALIA 2011-2016E SHAREHOLDER REMUNERATION: 'ZERO DIVIDEND POLICY SCENARIO'
2011E 2012E 2013E 2014E 2015E 2016E
DPS ordinaries
EUR/share
0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
DPS savings
EUR/share
0.0275 0.0275 0.0275 0.0275 0.0275 0.0275
Dividends cash-out
EUR m
1 183 166 166 166 166 166

2
Note that in this scenario TI would still pay EUR0.0275 DPS to saving shareholders each year as this is the minimum mandatory DPS (set in
company bylaw as the 5% of TI share nominal value, EUR0.55) to be paid to saving shareholders in every year the company achieves a profit.
Zero dividend policy:
only way to recover
some flexibility over
the next 2-3 years

www.cheuvreux.com

8

Indeed, according to our analysis, in this scenario, the company would be able to
reach a net debt/EBITDA ratio adjusted for minorities at 2.5x by 2013E, going down
to 2.2x in 2014E.
'ZERO DIVIDEND POLICY SCENARIO'
3.0
2.9
2.5
2.2
2.0
1.7
2.8
2.5
2.3
2.1
1.9
1.6
1.4
2.7
3.4
1.4
7.6
8.2
7.7
7.5
7.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011E 2012E 2013E 2014E 2015E 2016E
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
A good move probably lies ahead, far from enough though
Obviously the recent worries about a potential DPS cut have already triggered a nasty
market reaction (TI ordinary share price down -4.3% since the 24th January when the first
press reports were out) and more will likely follow over the short term. However, we would
judge the eventual management decision to cut the DPS (final decision to be taken either
on the 23rd February or on the 29th March) as a good move for TI as it would contribute
to improving the company's operational and financial flexibility and reduce the risk of a
credit rating downgrade.
On the other hand, we estimate any eventual partial cut will probably not be enough.
Indeed, as shown by the analysis we run below, neither a DPS cut in line with the press
reports or with our estimates would allow the company to accelerate its de-leverage
profile in any material way.

'Press reports scenario': we highlight here the de-leverage profile the company
could afford should the scenario prompted by the Italian press reports prove true,
with TI cutting its 2011E ordinary DPS to EUR0.043.
TELECOM ITALIA 2011-2016E SHAREHOLDER REMUNERATION: 'PRESS REPORT SCENARIO'
2011E 2012E 2013E 2014E 2015E 2016E
DPS ordinaries
EUR/share
0.0430 0.0430 0.0430 0.0430 0.0430 0.0430
DPS savings
EUR/share
0.0540 0.0540 0.0540 0.0540 0.0540 0.0540
Dividends cash-out
EUR m
1 183 897 897 897 897 897
According to our analysis, in this scenario the company would reduce its annual
dividend cash-out by EUR286m vs. 2011. In addition, comparing this scenario to the
'guidance scenario' we note TI would be able to reduce the expected annual cash-
out for dividends by EUR464m in 2012E and by EUR657m in 2013E. While the
savings are sizeable, we highlight the company's ability to de-leverage would remain
very limited over the next three years. We estimate the net debt/EBITDA ratio
adjusted for minorities still at 2.5x by 2014E vs. the 2.6x implied by the company
guidance. Note that our estimates do not include any cash-out for the upcoming 4G
auction in Brazil and the related investments.
Worries on eventual
DPS cut triggered
nasty market reaction,
but we would see it as
a good move
not enough though,
as the deleverage
profile would remain
too slow

www.cheuvreux.com

9

'PRESS REPORT SCENARIO'
3.0
2.9
2.8
2.6
2.5
2.3
2.8
2.5
2.4
2.2
2.1
1.7
2.1
1.9
3.4
1.4
2.5
2.7
2.5
2.5 2.6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011E 2012E 2013E 2014E 2015E 2016E
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0

'CA Cheuvreux's new forecast'. For the sake of completeness we present here
the de-leverage profile implied by our new official forecast. Such a scenario is very
close to the 'press scenario'; we set our DPS slightly above as we believe Telco
might need a slightly higher dividend (compared to the 'press scenario') to cover the
financial expenses on its own debt (for more details, see the next chapter).
TELECOM ITALIA 2011-2016E SHAREHOLDER REMUNERATION: 'CA CHEUVREUX NEW FORECAST'
2011E 2012E 2013E 2014E 2015E 2016E
DPS ordinaries
EUR/share
0.045 0.045 0.045 0.045 0.045 0.045
DPS savings
EUR/share
0.056 0.056 0.056 0.056 0.056 0.056
Dividends cash-out
EUR m
1 183 936 936 936 936 936
According to our official estimates, factoring in the new DPS at EUR0.045, flat over
the next few years, the net debt/EBITDA ratio adjusted for minorities would reach
2.5x in 2014E, in line with the 'press report scenario'.
'CA CHEUVREUX NEW FORECAST'
3.0
2.9
2.8
2.6
2.5
2.3
2.1
2.8
2.5
2.4
2.2
2.1
1.7
1.9
2.5 2.4
2.4
2.6
2.4
1.4
3.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011E 2012E 2013E 2014E 2015E 2016E
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0


www.cheuvreux.com

10

II Controlling shareholder's needs: hard place
TI's DPS must match the financing needs of its controlling shareholder. We expect
Telco debt to be refinanced with a 12/24 months bridge loan and a cost in the 4.0-4.5%
range. The minimum level for TI ordinary DPS to cover Telco interest costs would be in
the EUR0.043/0.048 range. We set our new 2011-13E DPS forecast in the middle of this
range, at EUR0.045.

To assess what will be management's decision on TI's DPS, we believe it is crucial to
understand the financial needs of Telecom Italia's controlling shareholder, Telco. TI's DPS
represents Telco's only source of covering the interest on its own debt. As a result it is
quite clear that TI's shareholder remuneration policy will be a compromise resulting from
the opposing interests of two different company stakeholders, the debt holders
represented by the rating agencies and the controlling shareholder's interest (please note,
not all the shareholders). This has always been the case somehow; what is new is that the
route for navigating a compromise is becoming ever more narrow and that rating agency
pressure this time is definitely the main driver. The consequences of an eventual rating
downgrade might be so negative as to make it unpalatable even for the not very
longsighted attitude of TI's controlling shareholders. In other words, we believe the DPS
finally approved by the board will be the highest that is possible without triggering a rating
downgrade. With this rationale in mind and on the back of our assessment of Telco's
financial needs, we have cut our 2011-2013E ordinary DPS forecast (as already
mentioned) to EUR0.045 vs. the previous EUR0.058.
TELECOM ITALIA 2011-2013E DPS: CA CHEUVREUX FORECAST REVISION
(EUR) 2011E 2012E 2013E
Old New Chg Old New Chg Old New Chg
DPS ordinaries
0.058 0.045 -22% 0.058 0.045 -22% 0.058 0.045 -22%
DPS savings
0.069 0.056 -19% 0.069 0.056 -19% 0.069 0.056 -19%

A look to the past.
For the sake of keeping control of the company in Italian hands, Italian politics has always
supported and even encouraged subsequent controlling structures that were very
stretched from a financial point of view. Shortly after the privatisation (Mr Colaninno OPA
in 1999) this finally turned to compromise the same development of TI as its capital
allocation strategy has not been tailored towards reasonable industrial goals (asset mix
diversification, operating investments, maintenance of a decent margin of operational and
strategic flexibility) but rather on the desperate need of the controlling shareholders to
squeeze as much money as possible from TI business to serve the debt of their stretched
controlling chains. Over the 2003-2011 period (and even more over 2003-2006, when the
company was led by Mr Tronchetti) TI sold valuable international operations, reducing its
diversification potential merely to afford an unsustainable dividend policy that finally
increased the company's financial leverage.
Upcoming decision on
TI's DPS policy:
compromise between
Telco needs and
rating agency
requests
Since the privatisation
TI's capital allocation
has been tailored to
controlling
shareholder cash-
needs..

www.cheuvreux.com

11

PAYOUT, INTERNATIONAL EXPOSURE AND FINANCIAL LEVERAGE OF FORMER EU INCUMBENTS OVER 2003-11E
(%, x) Avg payout EBITDA from Int. operations net of
minorities and one-offs
Net debt/EBITDA adj. for minorities
2003-2010 2002 2011E 2003 2011E
TI 83% 3% 15% 2.3 2.9
FT 66% NA 41% 2.6 2.0
DT 69% NA 50% 2.5 2.8
TEF 52% 5% 66% 1.5 2.4
avg 67% 4% 43% 2.2 2.5
As shown by the table above, TI increased its net debt/EBITDA ratio over the period (to a
higher extent than the average of the panel) not to invest in diversifying its asset mix (as
the others did), but merely to support a shareholders' pay-out significantly above the
sector average (reaching >100% over 2003-2006), which was also supported by the
disposal of many international start-ups. What the table fails to tell is that since 2003 TI
has not invested at all in international diversification
3
, in fact it has done the opposite.
Indeed, while the share of its EBITDA from international operations has grown during the
period (15% in 2011E vs. 3% in 2003) this has stemmed solely from the organic growth of
the Brazilian business and the decline of the domestic one. On the opposite side, almost
all the other international operations that were mostly in a start-up phase in 2003-2004
(therefore not giving any positive contribution at EBITDA level) have been sold, reducing
the diversification potential that they would have warranted, merely to enhance the flow of
dividends to the higher portion of the controlling chain. We believe this is the main driver
of the poor track record registered by TI's equity story so far.
...one to the present
The present unfortunately has little better to tell us. As it results from Telco's annual report
at 30th April 2011, the dividend that it cashes-in from its 22.4% stake in TI ordinary capital
is the only source to cover its financial expenses, which amounted to EUR124.6m and
related to the servicing of its EUR3.2bn of outstanding debt.
TELCO OUTSTANDING DEBT: COMMITED LINES, DRAWN LINES, INTEREST RATE, MATURITIES
Funding Committed Drawn at
30/04/2011
Interest rate Maturity
(EURm) (EURm)
Telco bond underwritten pro-quota by Telco shareholders
1 300 1 300 fixed at 4% June 2012
Banking facility Unicredit (agent)
4

1 300 1 070 Euribor +190 bp May 2012
Monte Paschi di Siena
600 600 Euribor +85 bp June 2012
GE Capital
260 260 Euribor +70 bp October 2012
Total 3 460 3 230 NM NM
Source: CA Cheuvreux/Telco annual report
Such debt is currently directly subscribed by Telco controlling shareholders (46.18%
Telefonica, 30.58% Generali, 11.62% Mediobanca, 11.62% Intesa-Sanpaolo) or funded
by third parties with a pledge on Telecom Italia shares.

3
With the very recent and immaterial exception of the few hundreds million euro invested to slightly increase its stake in Telecom Argentina. In
addition during the period in which TI was controlled by Pirelli, TI made some investments in fixed broadband operations in Germany and
France that were successively sold over the last 4 years.
4
According to press sources the EUR1.3bn banking facility of which Unicredit is agent would have the following breakdown: EUR400m
Unicredit, EUR400m Mediobanca, EUR350 Itesa-Sanpaolo, EUR120m Societe Generale.
this is the main
driver behind TI poor
equity story
TI DPS still only
source of cash for
Telco

www.cheuvreux.com

12

PLEDGE ON TELECOM ITALIA ORDINARY SHARES OWNED BY TELCO
Depositary institution Status N of shares Current market value Financing covered
(shares) (EURm) (EURm)
Unicredit
Unpledged 131 772 748 108 NM
Unicredit
Pledged 1 830 000 000 1 501 1 300
Monte dei Paschi
Pledged 737 716 814 605 600
GE Capital
Pledged 304 097 345 249 260
Total
NM 3 003 586 907 2 463 2 160
Source: CA Cheuvreux/Telco annual report
and finally one to the future
Since the future leads on from the past, on the back of the above it is quite clear that the
margin to hope for any sparks is very limited. TI's capital allocation strategy will remain
affected by the financial needs of its unsustainable controlling structure and the 'zero
dividend policy scenario' (described in the previous chapter) that we would see as an
urgent priority will remain out of management options.
It is crucial then to assess the financial needs of Telco going forward and even before that,
the way it will refinance its debt as it expires in different tranches over the next 6 months
(as it results from the table above).
Two main scenarios for Telco debt refinancing:

A rights issue at Telco level, with the shareholders basically paying down the
outstanding debt. Given the financial constraints and the capital constraints
(especially for the bank shareholders) of Telco shareholders we consider such a
scenario as very unlikely. The cash-out on a pro-rata basis would not be important in
relative terms but still significant. Furthermore, such an option would imply great
embarrassment for the management of the Telco shareholders as it would be difficult
for them to justify to their own shareholders additional equity investments in Telco
after the huge losses already suffered.
TELCO: SHAREHOLDER STRUCTURE TELCO REFINANCING SCENARIO 1:
RIGHTS-ISSUE
Generali
30.6%
Mediobanca
11.6%
Telefonica
46.2%
IntesaSanpaolo
11.6%

(EURm)
Generali
988
Mediobanca
375
IntesaSanpaolo
375
Total Italian shareholders
1 738
Telefonica
1 492
Total
3 230

Source: CA Cheuvreux; Company data Source: CA Cheuvreux

A refinancing through new debt funding either subscribed directly by Telco
shareholders or by third parties or a mix (as is the case currently). We believe the
refinancing of the entire outstanding debt directly by Telco shareholders (on a pro-
quota basis) is the most likely solution as it will allow it to minimise the cost of
funding. However, we expect even the eventual financing provided directly by Telco
shareholders to factor in conditions decently in line with market ones. Indeed, against
the current backdrop of capital market turmoil and rising funding costs, we would
expect the management of each one of the Telco's shareholders to refrain from
recognising it any easy funding, for the same reason of opportunities raised in the
previous bullet.
Telco refinancing:
shareholders will
probably provide new
credit lines

www.cheuvreux.com

13

TELCO REFINANCING SCENARIO 2: DEBT FUNDING FROM TELCO SHAREHOLDERS
(EURM)
Generali
988
Mediobanca
375
IntesaSanpaolo
375
Total Italian shareholders
1 738
Telefonica
1 492
Total
3 230
In this light, the best solution to keep Telco's funding costs as low as possible whilst
respecting market conditions might be to recognise it a 12 or 24 months bridge loan
with a cost of EURIBOR 6M (1.5%) + 250/300bp, corresponding to a total cost of
funding for Telco in the 4.0-4.5% range. Assuming Telco's 2012E average net debt to
be broadly in line with the EUR3.2bn reported at the end of April 2011, we estimate
Telco's 2012E interest expenses in the EUR130-145m range. This would be covered
by a TI ordinary DPS in the EUR0.043-0.048 range. Our new DPS forecast at
EUR0.045 is just at the middle of this range.
TI ORDINARY DPS TO COVER ASSUMED SPREAD RANGE ON TELCO REFINANCING
EURIBOR 6M % 1.5%
Spread bp 250 300
Telco total cost of funding
% 4.0% 4.5%
Telco financial expenses
EURM 129 145
TI ords DPS
EUR 0.043 0.048
N TI ordinary shares owned by Telco
mln shares 3 004 3 004
Dividend cash-in from TI
EURM 129 144

A 12/24 months bridge
loan might imply a
cost of funding in the
4.0-4.5% range for
Telco to be covered
by a TI DPS in the
EUR0.043-0.048 range

www.cheuvreux.com

14

III A profit warning the next step?
2012E guidance (due by end of March) is likely to represent the next negative catalyst.
The weakening of the macro outlook (in Italy and Brazil), coupled with the recent
operating trends and management comments point to risk of disappointment vs.
market expectations.

We expect the earnings momentum to remain poor at TI. Our estimates are slightly below
consensus on earnings and double digit below at DPS level. However, we believe there is
material risk on the downside: the expected contraction of private consumption might
trigger a further deterioration of the top line of the domestic business, currently not
factored in either our estimates or in market consensus. In addition, the slowdown of the
macro outlook in Brazil and the expected tightening of the competitive dynamics in the
Brazilian telecom market might trigger some disappointment from TIM Brasil, the group's
only growth engine.
TELECOM ITALIA 2011-2013E ESTIMATES: CA CHEUVREUX VS. CONSENSUS
(EURm; %) 2011E 2012E 2013E
Consensus CA Cheuvreux Delta Consensus CA Cheuvreux Delta Consensus CA Cheuvreux Delta
Revenues 29 741 29 887 0% 29 881 30 118 1% 30 111 29 844 -1%
EBITDA 12 228 12 209 0% 12 190 12 164 0% 12 182 12 014 -1%
Net Income -673 -631 6% 2 459 2 471 0% 2 480 2 445 -1%
Net Debt 31 468 30 993 -2% 29 693 29 007 -2% 27 770 26 760 -4%
DPS 0.063 0.045 -29% 0.071 0.045 -37% 0.079 0.045 -43%

2012E guidance: material downside risk on earnings
The next negative catalyst that we expect is the announcement of the 2012E outlook.
Recent management comments, the macro picture and the recent operational trends
seem to prepare the ground for a 2012E guidance significantly below our and market
expectations. For the time being we are merely fine-tuning our estimates mainly to factor
in the lower DPS (and, hence, lower net debt and higher net income) and higher EBITDA
from Telecom Argentina (TI economic interest just at 22.6%, included in our SOP at
market value). All in all, we have raised our EPS by 10% in 2011E and by <2% in 2012-
2013E (lower financial expenses on lower debt, higher contribution from Telecom
Argentina). However, we see material risk on the downside on our and market consensus
forecast for 2012-2013E. We highlight our forecast is based on FX for Brazilian real and
Argentine pesos in line with the average registered in FY-2011E.
We see several
elements pointing to a
material risk of
disappointment from
2012E guidance
We have fine-tuned
our estimates

www.cheuvreux.com

15

TELECOM ITALIA: 2011-2013E ESTIMATES REVISION
(EURm; %) 2011E 2012E 2013E
Old New Chg. Old New Chg. Old New Chg.
Revenues 29 854 29 887 0.1% 30 120 30 118 0.0% 29 888 29 844 -0.1%
Domestic 18 958 18 992 0.2% 18 085 18 083 0.0% 17 184 17 139 -0.3%
TIM Brasil 7 337 7 337 0.0% 7 955 7 955 0.0% 8 321 8 321 0.0%
Telecom Argentina 3 188 3 188 0.0% 3 731 3 731 0.0% 4 029 4 029 0.0%
EBITDA before non recurring 12 226 12 292 0.5% 12 214 12 264 0.4% 11 978 12 014 0.3%
Domestic 9 333 9 330 0.0% 8 888 8 856 -0.4% 8 417 8 365 -0.6%
TIM Brasil 2 003 2 003 0.0% 2 275 2 275 0.0% 2 413 2 413 0.0%
Telecom Argentina 950 1 020 7.4% 1 112 1 194 7.4% 1 201 1 289 7.4%
EBITDA 12 142 12 209 0.6% 12 114 12 164 0.4% 11 978 12 014 0.3%
EBITDA Margin 41% 41% 40% 40% 40% 40%
EBIT 3 434 3 501 1.9% 6 522 6 572 0.8% 6 364 6 401 0.6%
Net Income before minorities -252 -181 28.2% 2 907 2 948 1.4% 2 905 2 951 1.6%
Minorities 450 450 0.0% 477 477 0.0% 506 506 -0.1%
Net Income -702 -631 10.1% 2 430 2 471 1.7% 2 400 2 445 1.9%
Capex 6 070 6 072 0.0% 4 839 4 835 -0.1% 4 785 4 775 -0.2%
EBITDA-Capex 6 072 6 137 1.1% 7 275 7 329 0.7% 7 193 7 239 0.6%
Net Debt 31 051 30 993 -0.2% 29 358 29 007 -1.2% 27 413 26 760 -2.4%
EPS -0.04 -0.03 10.1% 0.13 0.13 1.7% 0.12 0.13 1.9%
EPS Adjusted 0.13 0.13 0.0% 0.13 0.13 1.7% 0.13 0.13 1.9%
DPS 0.058 0.045 -22.4% 0.058 0.045 -22.4% 0.058 0.045 -22.4%
Q4-2011E preview: turnaround not yet apparent
We expect Q4 to broadly confirm the trend already seen in Q3:

steady decline of the domestic fixed business (softened by the retail re-pricing
effective as of Q3);

struggling domestic mobile service revenues, down 6.4% y-o-y (massive
slowdown of volume growth, still double-digit outgoing yield decline);

Domestic EBITDA declining in the low single-digit. Cost cutting still partially
offsetting the top line contraction but scope for efficiency gains is getting smaller due
to the upward pressure on M&S expenses;

TIM Brasil still posting strong growth both at top line and EBITDA level, with a
contribution in euro terms partly reduced by Real depreciation in Q4 (-4.5% y-o-y).
TELECOM ITALIA: Q4-2011E PREVIEW
(EURm; %) Q4-2011E y-o-y Q4-2010A FY-2011E y-o-y FY-2010A
Revenues 7 813 2% 7 654 29 872 8% 27 572
Domestic 4 894 -2% 5 016 18 992 -5% 20 068
TIM Brasil 1 927 13% 1 703 7 322 18% 6 200
EBITDA pre one-offs 3 058 0% 3 058 12 292 4% 11 804
Domestic 2 261 -2% 2 296 9 330 -5% 9 778
TIM Brasil 555 7% 521 2 003 11% 1 802
EBITDA 3 034 3% 2 941 12 209 7% 11 415
Net Income 576 -56% 1 304 -631 NM 3 124
Net Debt 30 988 -3% 32 082 30 988 -3% 32 082
No main news from
Q4-2011E

www.cheuvreux.com

16

Our Telecom Italia model

TELECOM ITALIA: OPERATING ASSUMPTIONS ITALIAN UNIT
(%; EUR/month) 2009 2010 2011E 2012E 2013E
Mkt share fixed access 72% 69% 67% 66% 64%
Mkt share broadband access 57% 55% 53% 51% 49%
Mkt share mobile access 35% 33% 34% 34% 34%
ARPU fixed (access + voice) 28.9 27.7 26.9 25.5 23.6
y-o-y 0% -4% -3% -5% -7%
ARPU broadband (retail) 20.3 20.3 19.5 19.1 18.8
y-o-y 2% 0% -4% -2% -2%
ARPU mobile (services) 20.6 20.0 17.9 16.3 15.0
y-o-y -1% -3% -11% -9% -8%

TELECOM ITALIA: FINANCIALS ITALIAN UNIT
(EUR m, %) 2009 2010 2011E 2012E 2013E
Revenues 21 662 20 068 18 992 18 083 17 139
y-o-y -7% -7% -5% -5% -5%
Fixed 14 740 14 117 13 513 12 946 12 371
y-o-y -2% -4% -4% -4% -4%
Mobile 8 598 7 691 7 109 6 689 6 239
y-o-y -12% -11% -8% -6% -7%
EBITDA before non recurring 10 074 9 778 9 330 8 856 8 365
y-o-y -2% -3% -5% -5% -6%
EBITDA 9 895 9 393 9 230 8 756 8 365
y-o-y -1% -5% -2% -5% -4%
EBITDA margin 46% 47% 49% 48% 49%
Capex 3 523 3 106 4 184 2 829 2 688
Capex/Sales 16% 15% 22% 16% 16%
EBITDA-Capex 6 372 6 287 5 046 5 927 5 677
(EBITDA-Capex)/Sales 29% 31% 27% 33% 33%

TELECOM ITALIA: OPERATING ASSUMPTIONS BRAZILIAN UNIT
(%; EUR/month) 2009 2010 2011E 2012E 2013E
Mkt share mobile access 24% 25% 26% 26% 26%
ARPU mobile (services) 10.0 10.9 9.6 8.8 8.6
y-o-y 84% 9% -12% -8% -3%


www.cheuvreux.com

17

TELECOM ITALIA: FINANCIALS BRAZILIAN UNIT
(EUR m, %) 2009 2010 2011E 2012E 2013E
Revenues 5 022 6 200 7 337 7 955 8 321
y-o-y -4% 23% 18% 8% 5%
EBITDA 1 255 1 802 2 000 2 275 2 413
y-o-y 3% 44% 11% 14% 6%
EBITDA Margin 25% 29% 27% 29% 29%
Capex 965 1 216 1 255 1 289 1 323
Capex/Sales 19% 20% 17% 16% 16%
EBITDA-Capex 291 585 745 986 1 090
(EBITDA-Capex)/Sales 6% 9% 10% 12% 13%

TELECOM ITALIA: GROUP CASH-FLOW 2011-2013E
(EUR m; x) 2009 2010 2011E 2012E 2013E
EBITDA 11 115 11 412 12 209 12 164 12 014
WC -12 -227 -438 -325 -290
Cash taxes -2 301 -1 392 -1 433 -1 644 -1 638
Cash financial expenses -2 019 -1 854 -1 987 -1 980 -1 812
Capex -4 544 -4 583 -6 072 -4 835 -4 775
Disposals/(Investments) -1 607 -457 54 54
Other -1 883 -209 379 -323 -173
Free Cash-flow to Equity 356 3 753 2 202 3 111 3 380
Buybacks -11 0 0 0 0
Dividends -1 053 -1 093 -1 366 -1 126 -1 133
Equity capital injections 0 0 259 0 0
Total Cash Flow -708 2 660 1 094 1 986 2 247
Net Debt balance beginning 34 039 34 747 32 087 30 993 29 007
Net Debt balance ending 34 747 32 087 30 993 29 007 26 760
Avg Net Debt 34 393 33 417 31 540 30 000 27 884
Net Debt/EBITDA ratio adj. for min. 3.23 3.03 2.89 2.77 2.63
Dividend cover 0.34 3.43 1.36 2.39 2.59


www.cheuvreux.com

18

IV New TP to EUR0.69
We reiterate our 3/Underperform rating and cut our target price to EUR0.69 (EUR0.77),
to factor in a higher earnings downside risk. The stock is trading at double digit
discount vs. the avg. of the sector.

We cut our target price on TI ordinaries to EUR0.69 and on TI savings to EUR0.52 vs. the
previous EUR0.77 and EUR0.58, respectively. We are factoring in a higher beta to reflect a
stronger downside risk on earnings.
Our DCF based SOP model
Our valuation stems from a DCF-based sum-of-the-parts model (SOP) including all the
different business units (Domestic Fixed, Domestic Mobile, TIM Brasil). Other minor
assets, such as the equity stakes in Telecom Argentina, TI Media, Olivetti have been
included with other valuation methodologies. Net debt expected at end of 2011E has
been adjusted for minorities (TI Media, Telecom Argentina, TIM Brasil).
TELECOM ITALIA: SUM OF THE PARTS MODEL
Business Unit Valuation EV Stake EV Share Net Debt Equity Target price
(EUR m; %) Method to TI 2011E adj. Value Ordinary Saving
Domestic
35 835 100% 35 835 83%
Fixed
DCF 21 544 100% 21 544 50%
Mobile
DCF 16 512 100% 16 512 38%
Corporate & Elim.
6XEV/EBITDA'11E -2 220 100% -2 220 -5%
TIM Brasil
DCF 9 388 67% 6 260 14%
Other
NM NM 923 2%
TI Media
market capitalization 375 78% 291 1%
Olivetti
0.1XEV/Sales11E 34 100% 34 0%
Telecom Argentina
market capitalization 2 643 23% 598 1%
Net financial assets book value NM 100% 250 1%
Total
NM NM 43 268 100% 31 026 12 242 0.69 0.52
Our DCF models have been run over our 2012E-16E projections and based on a rolling
euro-denominated WACC. The risk-free rate and market risk premium are set at 4.5% and
4.0%, respectively by CA Cheuvreux's Economic & Strategy Team. For D/E, gross cost of
debt and unlevered and levered beta, we have taken the group average as a reference.
TELECOM ITALIA: DCF PARAMETERS
(%; x)
Risk free 4.5%
Market risk premium 4.0%
Unlevered beta 1.1
D/E 204%
Beta 2.7
Gross cost of debt 6.4%
To factor in the different risk profiles of the various markets, we introduced a country risk
premium factor, measured as: the spread of the local government bond (US denominated)
over a default-free government bond, multiplied for the relative equity market volatility for
that market (std dev in country equity market/std dev in country bond).
DCF based SOP
Our TP cut reflects
higher downside risk
on earnings

www.cheuvreux.com

19

TELECOM ITALIA: DCF PARAMETERS FOR THE DIFFERENT UNITS
(%; x) Domestic Fixed Domestic Mobile TIM Brasil
Average WACC 2012E-2016E 8.53% 8.53% 8.86%
Country risk premium 1.00% 1.00% 2.63%
Growth in perpetuity -3.50% -1.00% 2.50%
Implied EV/(EBITDA-Capex) 2011E 5.2 6.2 12.6
Implied EV/(EBITDA-Capex) exit 5.9 7.0 8.6
Implied EV/EBITDA 2011E 3.6 4.6 4.7
Implied EV/EBITDA exit 3.5 5.1 4.0
Growth rates have been defined according to the different prospects of the various units
considering the country demographics, telecom market penetration, company market
share, etc, and range from the -3.5% assumed for the domestic fixed unit to the +2.5%
assumed for the Brazilian asset. The implied EV/(EBITDA-Capex) exit multiples (2016)
range from the 5.9x of the domestic fixed unit to the 8.6x of the Brazilian unit. Finally, we
highlight that our implied 2011E EV/EBITDA multiple for the Brazilian unit is at 4.7x, below
the current trading multiples of TIM Brasil (currently trading at 5.3x).
Market multiples
TI is trading at a double-digit discount to the sector. This is below its historical relative
valuation level. We find this justified considering the company's structural issues (below-
average growth, excessive leverage), which in our view are not addressed by its current
capital allocation strategy.
In more detail:

On EV/EBITDA, the stock is trading at 3.9x on 2011E, 4.1x on 2012E and 3.9x on
2013E. This implies a discount to the average for the European Telecom Services
operators of ~20% on 2011E and around ~15% on 2012-2013E.

On P/E, the stock is trading at 6.3x on 2011E, 6.2x on 2012E and 6.2x on 2013E.
This is >30% below the average for the European Telecom Services operators.

On FCFE yield, the stock is trading at 19.5% on 2011E, 16.9% on 2012E and
18.4% on 2013E. This implies 350/530bp above the average for the European
Telecom Services operators.

On dividend yield, the stock is trading at 5.4% on 2011E and 5.7% on 2012-
2013E, respectively. This is >250bp below the average for the European Telecom
Services operators.
VALUATION MULTIPLE COMPARISON
(x; %) EV/EBITDA P/E EFCF yield Dividend yield
2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E
TI 3.9 4.1 3.9 6.3 6.2 6.2 19.5% 16.9% 18.4% 5.4% 5.7% 5.7%
TEF 5.9 5.2 5.0 9.3 9.5 9.0 17.4% 10.7% 12.8% 9.7% 7.4% 7.4%
FT 4.4 4.5 4.6 8.2 8.6 9.3 18.9% 15.3% 9.4% 11.5% 12.1% 10.4%
DT 4.5 4.2 4.0 10.7 11.1 10.3 17.0% 16.7% 16.8% 7.9% 8.1% 8.1%
KPN 4.9 5.1 5.0 8.7 9.5 8.8 15.3% 12.6% 12.6% 9.2% 10.7% 10.7%
TeliaSonera 5.5 5.2 4.9 11.0 10.2 9.7 5.6% 8.2% 8.8% 6.1% 6.5% 6.9%
Average 4.9 4.7 4.6 9.0 9.2 8.9 15.6% 13.4% 13.1% 8.3% 8.4% 8.2%

TI trading at material
discount

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20

Cheuvreux Tool Kit
Technical Analysis
Environmental, Social & Governance Issues


www.cheuvreux.com

21

Technical Analysis

Technical Analysis
MAIN CONCLUSIONS TELECOM ITALIA: RETESTING AGAIN THE LOWS.
The share breached the long-term
200-day moving average shifting
the trend to bearish. Since then, the
share has been making lower highs
and lows.
Since the low posted in September
last year, all the recoveries have
been capping near the broken long-
term moving average, now acting
as a strong barrier to the upside.
As long as the share caps below
the 200-day average, the share
could reach the support of the
reaction channel at the EUR0.75
level or retest again the low posted
last year at the EUR0.70 level.

Edouard GARRANA
Technical Analyst
egarrana@cheuvreux.com
(33) 1 41 89 73 42

Sep Oct Nov Dec 2010 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Mar Apr
-10
-5
0
5
-10
-5
0
5
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
LT avg
Reaction channel
Source: Thomson Reuters


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Environmental, Social & Governance Issues

Personnel lay-off program completed by 2012, launch of the eco-friendly products line last year

HIGHLIGHTS

The 2008-12E personnel layoff program, impacting the domestic unit, will be completed by 2012E. The total layoffs
should amount to 13.5k individuals.

TI is best in class in terms of productivity among European incumbents, along with KPN and Telefonica, according
to our estimates.

Board is dominated by director representatives of Telco who controls 22.4% of TI voting capital.

Italian Treasury has a golden share which effectively acts a poison pill.

Several Green IT initiatives and R&D activities on services reducing the environmental impact were pursued in
2011. First product of the eco-friendly line launched in 2011.

Significant reduction of energy use in heating, and decrease in CO2 emissions and electricity use in operations in
2010.

CORPORATE GOVERNANCE DETAILS
1. Does the company have a combined chair/CEO?
Yes
2. Percent Independent Directors
20.00%
3. Does the company disclose its corporate governance policies or guidelines?
Yes
4. Do all executive board members own shares after excluding options held?
Yes
5. Is the company currently under investigation for accounting irregularities?
Yes
6. Do all common or ordinary equity shares have one-share, one-vote, with no restrictions?
Yes
7. Do shareholders have a right to convene an EGM with 10% or less of the shares requesting one?
Yes
8. Do shareowners have a right to act in concert through written communication?
No
9. Potential Dilution from Stock Options Outstanding + Not Yet Granted Under Old or New Plans
1.30%
10. Is there a single shareholder or shareholder group which controls a majority of the voting power of the
company?
No
11. Has the company adopted a shareholder rights plan ("poison pill")?
No
12. Disclosure on CEO remuneration details (amount detailed if disclosed)
EUR
1.55M
The information contained in this table is written and presented under the sole responsibility of GMI. CA Cheuvreux does not accept any responsibility
for any loss which may arise from reliance on information contained in this table Source: CA Cheuvreux; GMI


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CORPORATE GOVERNANCE ANALYSIS
Telecom Italia (TI) has two classes of stock: ordinary (voting right) and savings (no voting right). TI is de-facto controlled
by a holding company (Telco), which owns 22.4% of voting shares. Telco shareholders (Telefonica 46.18%; Generali
30.58%; Intesa Sanpaolo 11.62%; Mediobanca 11.62%) signed a shareholding pact that will expire on 27th April 2013.
It is aimed at fixing: 1) Telco's governance; 2) the composition of the list of candidates for TI's board; 3) the circulation
of Telco and TI shares. While Italian shareholders own the majority stake in Telco, Telefonica has veto power over TI's
extraordinary operations.
Currently 80% of the board has been appointed by Telco (remaining 20% - Assogestioni) and is composed of 15
members of which 6 are independent. The CEO Franco Bernabe was appointed Chairman of the board in April 2011
when Gabriele Galateri di Genola stepped down as Chairman. However, Mr Galateri remains a board director of
Telecom Italia.
The Italian Treasury (which does not own any shares) has some special powers ('golden share') which can be used to
oppose the entry of new ordinary shareholders although this power has never been used. The company has not
adopted any defensive measures against a takeover. In 2006, the former manager in charge of company security was
placed under investigation by Italian authorities for alleged illegal practices in sensitive data management. TI is
collaborating with investigators and has launched an internal reorganization program, but the company has also been
placed under investigation. In 2010 former managers and employees of the company were put under investigation in
relation to a supposed money laundering and tax evasion scheme, involving TI and Fastweb as well. TI is collaborating
with investigators, however it has also been placed under investigation.
Individual components of remuneration are disclosed for key executives and there is evidence that long term incentive
awards are used to align management incentives to long term performance.

E&S ISSUES FOR THE INTEGRATED TELECOM SERVICES SECTOR
1 Telecom companies have implemented massive restructuring measures over the past five years in order to
adapt to the opening up of the market and ongoing technological change. How has the company carried out
its restructuring plans? Has it made staff redundant, and if so, what is its approach to handling such
redundancies? Does it encourage internal staff mobility?
Analysis for Telecom Italia
Recent headcount evolution. Headcount remained almost unchanged in H1 2011 with a total of ca. 84k employees.
During this period, the company slightly decreased its workforce in Italy (217 net reduction), Brazil (107 net
reduction) while increasing it in Argentina (446 net increase). In 2010, TI's total headcount broke down between Italy
(69% of its total employees and its foreign operations (31%). By 2012 the company should complete the layoff
programme.
The bulk of the cost cutting program already carried out. The company launched a redundancy programme for
the domestic unit articulated in different subsequent stages. All in all the layoff plan will involve the 2008-2012
period, for a total of 13.5k layoffs. More in details 9k were already executed by the end of 2010. The remaining 4.5k
layoffs will be executed over the 2010-2012 period. Internal mobility is included as part of company rightsizing
actions and includes a 50% reduction of managerial roles (domestic unit only). The personnel restructuring plan
stemmed from the necessity to reduce the impact on company margins of the declining top line at the domestic unit,
stemming from higher competition and market saturation. The cost of the staff restructuring amounted to
>EUR0.4bn, which was booked mainly in 2008. No significant labour tensions have been registered since the plan
was launched and implemented.
Productivity: TI best in class along with KPN and Telefonica. TI enjoys productivity ratios (measured as
revenues/employees, labour cost/revenues) at the high-end/mid of the panel of the former European incumbents
behind Telefonica and KPN and better than France Telecom and Deutsche Telekom. At the end of FY-2010, TI
reported revenues/employee at EUR625.7k and labour cost/revenues ratio at 17%. Also on the back of the higher
productivity TI enjoys profitability ratios at the high-end/mid of the considered panel with a cash cost/revenues ratio
at 69% in FY-2010.


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2 Telecom companies can help their clients reduce CO2 emissions thanks to green IT, including
collaborative work, smart grid, paper-free workflow, etc. How is the company positioned to seize these new
opportunities? How does the company attempt to mitigate the environmental impact from its own
operations?
Green IT products. TI launched in 2011 the first product of its line of eco-friendly products, the TI Green brand: an
environmentally-friendly modem. The Wi-Fi N ADSL modem is supposed to use about 40% less power and generate
40% less GHG emissions compared with former generation of modems. Although TI does not disclose data on the
impact of these eco-friendly products on sales, we estimate it as very marginal.
Among other initiatives, TI led the Home Access Gateway "GREEN" (Green Router for Energy Efficient home
Networking) energy consumption benchmarking campaign which presents information on the current potential for
achieving further energy savings. These indications aim ultimately at bolstering the creation of a new CoC for
broadband equipment in the EU and supporting the activities of the ETSI Environmental Engineering (EE) group. This
energy use benchmarking campaign took place in the context of the ETNO (European Telecommunications Network
Operators' Association). Within the framework of the ITU-T SG5 WP3 Q21, TI also contributed to the review of the
L.1000 recommendation on the universal battery charger for mobile phones (Universal Mobile Charger) with a view to
lower the amount of options available for connectors and cables and come up with one harmonised solution for all
models. TI has also developed an energy management service using ICT solutions that enable to improve the energy
use thanks to systems that monitor equipment at distance, through evolved sensors and applications provided by
Telecom Italia Data Centres. The application of Guidelines for the Evaluation of Products Lifecycles (started in
2007) pursued in 2010 on a sample of 46 products. These guidelines use an eco-compatibility index in order to
assess goods' compliance with environmental legislation requirements. However, we highlight that the group is not
implementing any system to measure the indirect positive impact of its services.
R&D. TI's R&D is focused on several services to reduce the environmental impact: Next Generation Data Center,
Next Generation Workplace, ITS & Infomobility platform, smart metering, smart town, EARTH (Energy Aware Radio
and neTwork tecHnologies), and Telepresence. TI does not disclose the amount of R&D expenses specifically
allotted to these services.
Environmental impact from operations. Key reductions achieved by Telecom Italia S.p.A. in 2010 include: 31% in
the total energy use from heating, 6.9% in direct CO2 emissions (scope 1), 5.1% in indirect CO2 emissions (scope 2)
and 3.4% in electricity consumption. The reduction in energy consumption for heating was mainly achieved thanks to
the activation of Data Processing Centres (DPCs) of large co-generation plants. No CO2 targets are reported going
forward but TI has committed to stabilise its total electric use in 2011. We note that TI fell short from its 2010 target
of having 500,000 kWh of self production of electricity from renewable sources as this figure stood at 216,000 kWh
at the end of the year. TI's new target was to reach 300,000 kWh in 2011. TI also set a 2011 target to have 75,000
MWh of self-production of electricity from mixed sources (cogeneration), compared to 63,753 MWh as of 2010. TI
pursued in H1 2011 various measures which aim at improving the energy efficiency of its operations (upgrade of data
centres' servers, overhaul of AC/DC conversion equipment etc.). The company also carried out new projects
dedicated to increase the use of alternative energy sources, including the installation of a combined wind and
photovoltaic power supply system at some RBSs (8 RBSs now operate with this system), the installations of three
geo-cooling systems and the activation of five new small methane-powered cogeneration plants in industrial facilities
related to fixed network stations (17 plants operate now with this system).
Telecom Italia S.p.A. also reports an eco-efficiency indicator which combines customers services (measurement of
bits transmitted) and TI's energy consumption. The indicator is measured as bit/Joule. TI posted a 29% improvement
y-o-y in 2010 and targeted a 15% rise for 2011.
TI conducted a campaign on hazardous waste to replace lead batteries and reported ca. 18m kg of total waste
consigned by the group in 2010. Telecom Italia S.p.A.'s ratio between waste produced and waste consigned for
recycling/recovery reached 91.5% in 2010, a slight improvement compared to 2010 (+0.64%). Telecom Italia S.p.A.'s
also reported that it has refurbished some of its equipment in order to lower the amount of waste produced.


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3 Given the uncertainties regarding the health risks of electromagnetic fields (EMF) for children, advertising
and marketing campaigns should not target this population. What are the companys practices and policies
on this issue?
Telecom Italia Groups policy on the electromagnetic emissions field is supported by the search for advanced
technological instruments during monitoring and verification activities. Telecom Italia mentions that regular
monitoring of electromagnetic emission levels by La7, MTV and Telecom Italia Media Broadcasting installations is
continuing. Specifically, Telecom Italia Media Group ensures that electromagnetic fields produced by emissions of its
own installations are always below 20 V/m in areas which can be reached by people other than staff; that
electromagnetic fields never exceed 6 V/m in areas located near private homes, nurseries, schools or which are
populated for more than four hours a day, and that workers exposure levels do not exceed EC Directive 2004/40/CE
levels, and this has recently been acknowledged by Italian legislation through the Legislative Decree 257/2007.
On the basis of inspections performed throughout Italy electromagnetic emissions generated individually by La7 and
MTV proved to be within legal limits, with significantly lower values in case of digital television broadcasts, reducing
electromagnetic emissions by approximately 75% compared to traditional similar broadcasting. In 2010, all the so-
called "models of technologically innovative mobile solutions" sold in Italy and branded TIM, along with 25% of the
phones distributed in Brazil and carrying the brand TIM Brasil were tested in TI's laboratories according to SAR
qualification. Ti states that it conforms with the ICNIRP (International Commission on Non-Ionizing Radiation
Protection) guidelines and the appropriate declarations of conformity.
Nevertheless, Telecom Italia does not report any investments planned to support contributions to research on radio
waves (unlike France Telecom which reports having spent EUR715,000 in 2010). Moreover, the company does not
disclose any information on how EMF-related liabilities are covered or provisioned, a risk that we believe could
materialise via class action suits in the future.

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Telecom Italia
FY to 31/12 (Euro m) 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Profit & Loss Account
Sales 29 918.0 31 275.0 31 290.0 30 158.0 27 163.0 27 572.0 29 887.0 30 118.0 29 844.0
% Change 5.7% 4.5% 0.0% -3.6% -9.9% 1.5% 8.4% 0.8% -0.9%
Staff costs 4 142.0 3 801.0 3 884.0 4 220.0 3 734.0 4 021.0 3 975.0 4 006.0 3 969.0
Other costs (21 543.0) (22 227.0) (23 557.0) (23 010.0) (19 782.0) (20 181.0) (21 653.0) (21 960.0) (21 799.0)
EBITDA 12 517.0 12 849.0 11 617.0 11 368.0 11 115.0 11 412.0 12 209.0 12 164.0 12 014.0
% Change -2.7% 2.7% -9.6% -2.1% -2.2% 2.7% 7.0% -0.4% -1.2%
Depreciation (5 232.0) (5 487.0) (5 811.0) (5 906.0) (5 551.0) (5 547.0) (5 549.0) (5 592.0) (5 613.0)
EBITA 7 285.0 7 362.0 5 806.0 5 462.0 5 564.0 5 865.0 6 660.0 6 572.0 6 401.0
% Change -9.6% 1.1% -21.1% -5.9% 1.9% 5.4% 13.6% -1.3% -2.6%
Goodwill amortisation before OP 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill amortisation [impairment test] 0.0 0.0 0.0 0.0 0.0 0.0 (3 182.0) 0.0 0.0
Non recurring operational items 214.0 74.0 (42.0) 2.0 (71.0) (52.0) 23.0 0.0 0.0
EBIT 7 499.0 7 436.0 5 764.0 5 464.0 5 493.0 5 813.0 3 501.0 6 572.0 6 401.0
Net financial items (1 987.0) (1 973.0) (2 149.0) (2 634.0) (2 221.0) (1 785.0) (1 987.0) (1 980.0) (1 812.0)
Non recurring financial items 23.0 51.0 486.0 68.0 67.0 99.0 0.0 0.0 0.0
Other exceptional items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax (2 395.0) (2 519.0) (1 682.0) (653.0) (1 121.0) (548.0) (1 683.0) (1 644.0) (1 638.0)
Associates [contribution] 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Discontinuing activities 550.0 7.0 36.0 (29.0) (622.0) (7.0) (11.0) 0.0 0.0
Goodwill amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net profit [loss] before minorities 3 690.0 3 002.0 2 455.0 2 216.0 1 596.0 3 572.0 (181.0) 2 948.0 2 951.0
Dividend to preferred shares 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Minorities (474.0) 11.0 (7.0) (1.0) (15.0) (451.0) (450.0) (477.0) (506.0)
Net attributable profit [loss] 3 216.0 3 013.0 2 448.0 2 215.0 1 581.0 3 121.0 (631.0) 2 471.0 2 445.0
Restatement [impairment test] 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Adj. for exceptional items (134.0) (68.0) (262.0) (99.0) 3.0 (41.0) 3 167.0 0.0 0.0
Net attrib. profit [loss], restated 3 082.0 2 945.0 2 186.0 2 116.0 1 584.0 3 080.0 2 536.0 2 471.0 2 445.0
% Change 49.9% -4.4% -25.8% -3.2% -25.1% 94.4% -17.7% -2.6% -1.1%
Cash Flow Statement
Cash flow 10 368.0 10 012.0 8 701.0 8 656.0 4 912.0 7 957.0 9 168.0 8 217.0 8 391.0
% Change 12.1% -3.4% -13.1% -0.5% -43.3% 62.0% 15.2% -10.4% 2.1%
Change in WCR 564.0 (521.0) 608.0 (814.0) (12.0) (227.0) (438.0) (325.0) (290.0)
Capex (5 173.0) (5 114.0) (5 520.0) (5 365.0) (4 544.0) (4 583.0) (6 072.0) (4 835.0) (4 775.0)
o/w Growth capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net cash flow 5 759.0 4 377.0 3 789.0 2 477.0 356.0 3 147.0 2 658.0 3 057.0 3 326.0
Financial investments (13 356.0) 139.0 642.0 (6.0) (54.0) 0.0 (457.0) 54.0 54.0
Net buyback of treasury shares 0.0 0.0 0.0 0.0 (11.0) 0.0 0.0 0.0 0.0
Disposals 950.0 1 038.0 0.0 857.0 53.0 607.0 0.0 0.0 0.0
Dividend paid (2 328.0) (2 997.0) (2 831.0) (1 665.0) (1 053.0) (1 093.0) (1 366.0) (1 126.0) (1 133.0)
Capital increase 1 876.0 0.0 0.0 0.0 0.0 0.0 259.0 0.0 0.0
Other cash flow 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dec. [inc.] in net debt (7 099.0) 2 557.0 1 600.0 1 663.0 (709.0) 2 661.0 1 094.0 1 985.0 2 247.0
Balance Sheet
Shareholders' equity [group share] 25 662.0 26 018.0 25 922.0 26 126.0 25 952.0 28 819.0 27 005.0 28 541.0 30 050.0
Minority interests 1 323.0 1 080.0 1 063.0 730.0 1 168.0 3 791.0 4 317.0 4 603.0 4 911.0
Pension provisions 1 351.0 1 262.0 1 151.0 1 212.0 1 075.0 1 129.0 1 073.0 1 019.0 968.0
Other provisions 2 910.0 2 632.0 2 490.0 2 231.0 1 241.0 1 946.0 2 408.0 2 093.0 1 912.0
Net debt [cash] 39 858.0 37 301.0 35 701.0 34 039.0 34 747.0 32 087.0 30 993.0 29 007.0 26 760.0
Gearing [%] 147.7 137.7 132.3 126.7 128.1 98.4 99.0 87.5 76.5
Capital invested 71 104.0 68 293.0 66 327.0 64 338.0 64 183.0 67 772.0 65 796.0 65 263.0 64 601.0
Goodwill 43 980.0 43 739.0 44 420.0 43 891.0 43 627.0 43 912.0 40 730.0 40 730.0 40 730.0
Intangible assets 6 810.0 6 740.0 6 985.0 6 492.0 6 282.0 7 903.0 8 301.0 8 293.0 8 261.0
Tangible assets 18 041.0 17 215.0 16 934.0 15 662.0 14 902.0 16 550.0 16 675.0 15 926.0 15 120.0
Financial assets 2 516.0 2 370.0 1 407.0 1 295.0 1 686.0 1 451.0 1 931.0 1 877.0 1 823.0
Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Working capital requirement (243.0) (1 771.0) (3 419.0) (3 002.0) (2 314.0) (2 044.0) (1 841.0) (1 562.0) (1 332.0)
WCR as a % of sales (0.8) (5.7) (10.9) (10.0) (8.5) (7.4) (6.2) (5.2) (4.5)
Capital employed 71 104.0 68 293.0 66 327.0 64 338.0 64 183.0 67 772.0 65 796.0 65 264.0 64 602.0

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27

Telecom Italia
FY to 31/12 (Euro) 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Per Share Data (at 1/2/2012)
EPS before goodwill 0.18 0.15 0.11 0.11 0.08 0.16 0.13 0.13 0.13
% Change 36.7% -12.6% -26.1% -2.7% -25.5% 95.1% -17.5% -3.0% -0.8%
EPS, reported 0.18 0.16 0.13 0.11 0.08 0.16 (0.03) 0.13 0.13
% Change 60.2% -14.4% -18.7% -9.5% -28.9% 98.8% NS NS -0.8%

Goodwill per share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend per share 0.14 0.14 0.08 0.05 0.05 0.06 0.05 0.05 0.05
Cash flow per share 0.59 0.52 0.45 0.45 0.26 0.41 0.48 0.43 0.44
% Change 1.9% -11.7% -13.1% -0.2% -43.3% 62.0% 15.3% -10.5% 2.1%
Book value per share 1.2 1.2 1.3 1.3 1.3 1.4 1.3 1.4 1.5

No. of shares, adjusted 19397.000 19407.000 19407.000 19407.000 19407.000 19434.000 19434.000 19434.000 19434.000
Av. number of shares, adjusted 17757.000 19402.000 19407.000 19407.000 19407.000 19420.000 19434.000 19434.000 19434.000
Treasury stock, adjusted 126.000 126.000 126.000 151.000 162.000 162.000 162.000 162.000 162.000
Share Price [Adjusted]
Latest price 2.46 2.29 2.13 1.15 1.09 0.97 0.83 0.79 0.79
High 3.19 2.66 2.48 2.18 1.26 1.18 1.16 0.88 -
Low 2.28 2.04 1.87 0.72 0.76 0.88 0.70 0.77 -
Average price 2.68 2.28 2.16 1.32 1.05 1.03 0.93 0.82 -

Market capitalisation 32 890.2 30 642.5 28 434.6 15 388.2 14 558.5 12 965.5 11 142.0 10 619.1 10 619.1
Enterprise value 74 555.2 69 782.5 67 159.6 53 193.2 53 335.5 48 415.5 48 219.0 49 527.8 47 229.8
Valuation
P/E 14.1 15.0 18.7 10.5 13.2 6.0 6.3 6.2 6.2
P/E before goodwill 14.1 15.0 18.7 10.5 13.2 6.0 6.3 6.2 6.2
P/CF 4.2 4.4 4.7 2.6 4.3 2.3 1.7 1.9 1.8
Attrib. FCF yield [%] 17.5 14.3 13.3 16.1 11.3 22.8 19.5 16.9 18.4
P/BV 2.1 1.9 1.7 0.9 0.8 0.7 0.6 0.6 0.5
Enterprise value / Op CE 1.1 1.1 1.0 0.8 0.9 0.7 0.8 0.8 0.8
Yield [%] 5.7 6.1 3.8 4.3 4.6 6.0 5.4 5.7 5.7

EV/EBITDA, restated 6.0 5.4 5.8 4.7 4.8 4.2 3.9 4.1 3.9
EV/EBITA, restated 10.2 9.5 11.6 9.7 9.6 8.3 7.2 7.5 7.4
EV/Sales 2.49 2.23 2.15 1.76 1.96 1.8 1.6 1.6 1.6
EV/Debt-adjusted cash flow 6.5 6.3 6.7 5.0 8.4 5.1 4.6 5.2 4.9
Financial Ratios
Interest cover 6.3 6.5 5.4 4.3 5.0 6.4 6.1 6.1 6.6
Net debt/Cash flow 3.8 3.7 4.1 3.9 7.1 4.0 3.4 3.5 3.2
EBITDA margin [%] 41.8 41.1 37.1 37.7 40.9 41.4 40.9 40.4 40.3
EBITA margin [%] 24.4 23.5 18.6 18.1 20.5 21.3 22.3 21.8 21.4
Net margin [%] 12.3 9.6 7.8 7.3 5.9 13.0 NS 9.8 9.9
Capital turn [Sales/ Op. CE] 0.4 0.5 0.5 0.5 0.4 0.4 0.5 0.5 0.5
Gearing [%] 147.7 137.7 132.3 126.7 128.1 98.4 99.0 87.5 76.5
Payout ratio [%] 77.3 90.2 63.4 43.8 61.4 36.1 (138.6) 35.4 35.8
Return [%]
Pre-tax RoCE 10.6 11.2 8.9 8.7 8.9 8.8 10.4 10.4 10.2
RoCE after tax 6.1 6.0 5.3 6.7 5.9 7.7 6.7 6.6 6.5
ROE [%] 13.4 12.3 9.9 8.9 6.3 11.5 NS 9.0 8.5
Return on equity, restated 12.8 12.0 8.8 8.4 6.3 11.3 9.9 9.0 8.5


www.cheuvreux.com

28

Important Disclosures
APPLICABLE DISCLOSURE CLAUSES
Company Closing Price Rating Disclosures
Telecom Italia
EUR0.79 3/Underperform E

A - One or more companies in the Crdit Agricole S.A. group owned more than 1% of the total issued share capital of the Company as of the end
of the second most recent month preceding the publication date of this report.
B - One or more companies in the Crdit Agricole S.A. group owned more than 5% of the total issued share capital of the Company as of the end
of the second most recent month preceding the publication date of this report.
C - The Company owned more than 5% of the total issued share capital of Crdit Agricole SA as of the end of the second most recent month
preceding the publication date of this report.
D - One or more companies in the Crdit Agricole S.A. group held, as of the end of the second most recent trading day, a net sales position higher
than 1% of the total issued share capital of the Company.
E - The trading portfolio of one or more companies in the Crdit Agricole S.A. group contained shares of the Company as of the end of the second
most recent trading day.
F - Crdit Agricole Cheuvreux and/or a company in the Crdit Agricole S.A. group is a market maker or a liquidity provider for the financial
instruments of the Company.
G - Crdit Agricole CIB and/or a company in the Crdit Agricole S.A. group has been involved within the last three years in a publicly disclosed
offer of or on financial instruments of the Company.
H - Crdit Agricole CIB and/or a company in the Crdit Agricole S.A. group has concluded or is party to a non confidential agreement relating to
the provision of investment banking services (except publicly disclosed offers mentioned under G) to the Company during the past 12 months
or that has given rise during the same period to the payment of compensation or to the promise to get a compensation paid.
I - This research has been communicated to the Company and following this communication, its conclusions have been amended before its
dissemination.
J - A director or a board member of the Crdit Agricole S.A. group is an officer, director, or board member of the Company.

SPECIFIC DISCLOSURE CLAUSES
None

CHEUVREUX'S RATING AND TARGET PRICE SYSTEM
Ratings are built for a 6 to 12 month time horizon.
1/Selected List
Expected to outperform the market and is in our country selected list
2/Outperform
Expected to outperform the market
3/Underperform
Expected to perform at best in line with the market
4/Sell
Expected to underperform the market substantially
No Rating or Suspended
The investment rating and target price have been suspended. Such suspension is pursuant to
Cheuvreux's policy in circumstances when Cheuvreux's parent company, Crdit Agricole CIB, is
acting in an advisory capacity in a merger or strategic transaction involving this company or when
Crdit Agricole CIB or Crdit Agricole has a beneficial interest in this company and in certain other
circumstances.
Target price methodology
Cheuvreux's target prices are derived from one or more of the following methodologies: DCF,
SOP, peer comparison and EVA.
Quote definitions
Unless specified, all quotes that appear on Institutional research reports are closing prices the last
business day.


www.cheuvreux.com

29

OVERALL RATING BREAKDOWN (AS AT 24/01/2012) RATING BREAKDOWN IN THE SECTOR (AS AT 24/01/2012)

0
50
100
150
200
250
300
350
1/Selected List 2/Outperform 3/Underperform 4/Sell
Number of companies in each cat egory
Number of companies in each rat ing having received Crdit Agricole CIB invest ment banking services wit hin
t he last 12 mont hs
0
1
2
3
4
5
6
7
8
1/Selected List 2/Outperform 3/Underperform 4/Sell

SHARE PRICE TREND AND DATES OF CHANGES IN
RATING AND/OR TARGET PRICE

DATES OF CHANGES IN
TARGET PRICE AND/OR RATING

N
Date Rating Target
price
1
18/05/2009 EUR0.80
2
27/10/2009 EUR0.90
3
03/03/2010 EUR0.85
4
04/03/2010 4/Sell
5
25/02/2011 3/Underperform
5
4
0.73
0.83
0.93
1.03
1.13
1.23
05/09 11/09 05/10 11/10 05/11 11/11
Share price Rating change Target price change

6
13/01/2012 EUR0.77

LOCAL REGULATORY AUTHORITIES
Country Cheuvreux legal entity Regulatory authority
France Crdit Agricole Cheuvreux SA Autorit des Marchs Financiers (AMF)
Germany Crdit Agricole Cheuvreux Niederlassung Deutschland Bundesanstalt fr Finanzdienstleistungsaufsicht (Bafin)
Greece Crdit Agricole Cheuvreux Regus Hellas SA Capital Market Commission (HCMC)
Italy Crdit Agricole Cheuvreux Milan Branch Commissione Nazionale per le Societa e la Borsa (Consob)
The Netherlands Crdit Agricole Cheuvreux - Amsterdam Branch Autoriteit Financile Markten (AFM)
Spain Crdit Agricole Cheuvreux Espana SV SA Comisin Nacional del Mercado de Valores (CNMV)
Sweden Crdit Agricole Cheuvreux Nordic AB Finansinspektionen
Switzerland Crdit Agricole Cheuvreux - Zurich Branch Autorit fdrale de surveill. des marchs financiers (FINMA)
United Kingdom Crdit Agricole Cheuvreux International Ltd Financial Services Authority (FSA)
Turkey Crdit Agricole Cheuvreux Menkul Degerler A.S. Capital Markets Board (CMB)

www.cheuvreux.com

30

Signatory of the Principles
for Responsible Investment
www.cheuvreux.com
RESEARCH & DISTRIBUTION CENTRES
BENELUX
CRDIT AGRICOLE CHEUVREUX AMSTERDAM BRANCH
JOHANNES VERMEERSTRAAT 9
1071 DK AMSTERDAM
TEL. : +31 20 573 06 66 FAX : +31 20 573 06 90
FRANCE
CRDIT AGRICOLE CHEUVREUX S.A.
9, QUAI PAUL DOUMER
92400 COURBEVOIE
TEL: +33 1 41 89 70 00 FAX: +33 1 41 89 70 05
GERMANY
CRDIT AGRICOLE CHEUVREUX FRANKFURT BRANCH
TAUNUSANLAGE 14
D-60325 FRANKFURT AM MAIN
TEL: +49 69 47 897 100 FAX: +49 69 47 897 530
GREECE
CRDIT AGRICOLE CHEUVREUX - ATHENS BRANCH
1 KORAI STREET (3RD FLOOR)
10564 ATHENS
TEL : +30 210 373 4000 FAX: +30 210 373 4001
ITALY
CRDIT AGRICOLE CHEUVREUX MILAN BRANCH
PIAZZA CAVOUR 2
20121 MILAN
TEL: +39 02 80 62 83 00 FAX: +39 02 86 46 15 70
SPAIN
CRDIT AGRICOLE CHEUVREUX ESPAA S.V. S.A.
PASEO DE LA CASTELLANA 1
28046 MADRID
TEL: +34 91 495 16 48 FAX: +34 91 495 16 60
SWEDEN
CRDIT AGRICOLE CHEUVREUX NORDIC AB
REGERINGSGATAN 38
10393 STOCKHOLM
TEL: +468 723 5100 FAX: +468 723 5101
SWITZERLAND
CRDIT AGRICOLE CHEUVREUX ZURICH BRANCH
BAHNHOFSTRASSE 18
8001 ZURICH
TEL: +41 44 218 17 17 FAX: +41 44 218 17 87
TURKEY
CRDIT AGRICOLE CHEUVREUX MENKUL DEGERLER A.S.
BUYUKDERE CAD. YAPI KREDI PLAZA C BLOK KAT:15
LEVENT 34330 - ISTANBUL
TEL: +90 212 371 19 00 FAX: +90 212 371 19 01
UNITED KINGDOM
CRDIT AGRICOLE CHEUVREUX INTERNATIONAL LIMITED
12TH FLOOR
MOORHOUSE - 120 LONDON WALL
LONDON EC2Y 5ET
TEL: +44 207 621 5100 FAX: +44 207 621 5101
DISTRIBUTION CENTRES
JAPAN
CHEUVREUX
CRDIT AGRICOLE SECURITIES ASIA B.V., TOKYO BRANCH
SHIODOME SUMITOMO BUILDING, 15TH FLOOR
1-9-2 HIGASHI-SHIMBASHI
MINATO-KU
TOKYO 105-0021
TEL: +81 3 4580 8522 FAX: +81 3 4580 5534
UNITED STATES
CRDIT AGRICOLE CHEUVREUX NORTH AMERICA, INC.
BOSTON
99 SUMMER STREET, SUITE 220
BOSTON, MA 02110
TEL: +1 (617) 295 01009
NEW YORK
1301 AVENUE OF THE AMERICAS 15TH FLOOR
NEW YORK, NY 10019
TEL: +1 (212) 492 8800 FAX: +1 (212) 492 8801
SAN FRANCISCO
50 CALIFORNIA STREET, SUITE 860
SAN FRANCISCO, CA 94111
TEL: +1 (415) 255 9802 FAX: +1 (415) 956 9940
Copyright Crdit Agricole Cheuvreux, 2012. All rights reserved
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via ThomsonReuters or Bloomberg unless otherwise indicated. Data is sourced from CA
Cheuvreux and subject companies.
This research report or summary ("Research") has been prepared by Crdit Agricole Cheuvreux or one of its affiliates or branches (collectively CA Cheuvreux) from information believed to be reliable. The opinions and projections
expressed in this document are entirely those of CA Cheuvreux and are given as part of its normal research activity. CA Cheuvreux has not independently verified the information given in this document. Accordingly, no
representation, guarantee or warranty, express or implied, is made as to the accuracy, completeness, correctness or fairness of this information and opinions contained in this document or the research or analysis upon which such
information and opinions are based. Any opinions or estimates expressed herein reflect the judgment of CA Cheuvreux as of the date the Research was prepared and are subject to change at any time without notice. Unless
otherwise stated, the information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually.
Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. CA Cheuvreux recommends that independent advice should be sought, and that investors should
make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after consulting their own investment advisers.
CA Cheuvreux, its parent companies or its affiliates may effect transactions in the securities described herein for their own account or for the account of others, may have positions with the issuer thereof, or any of its affiliates, or
may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. The organisational and administrative arrangements established by CA Cheuvreux for the management of conflicts of
interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities industry. These arrangements can be found in CA Cheuvreuxs policy for managing conflicts of interest,
available at www.cheuvreux.com. Current research disclosures regarding companies mentioned in this Research are also available at www.cheuvreux.com.
This Research is provided for information purposes only. It is not intended as an offer, invitation or solicitation to buy or sell any of the securities described or discussed herein and is intended for use only by those Professional
Clients to whom it is made available by CA Cheuvreux. This Research is not for distribution to Retail Clients. The recipient acknowledges that, to the extent permitted by applicable securities laws and regulations, CA Cheuvreux
disclaims all liability for providing this Research, and accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents.
CA CHEUVREUX RESEARCH AND DISTRIBUTION
1. IN THE UNITED STATES, CREDIT AGRICOLE CHEUVREUX NORTH AMERICA, INC. (CAC NORTH AMERICA) SPECIFICALLY ADVISES THAT IT DID NOT PREPARE, HAS NOT CONTRIBUTED TO, HAS NOT ANALYZED, AND
DOES NOT ENDORSE THIS RESEARCH. CAC North America is a SEC-registered broker-dealer, and is not an investment adviser. CAC North America does not manage assets of other entities, CAC North America does not
provide investment advice, and CAC North America neither issues nor promulgates reports or analyses within the meaning of Section 202(a)(11) of the Investment Company Act of 1940, as amended. CAC North America is unable
to provide any additional information of any sort regarding this Research, and can neither support or refute any of the content, opinions, estimates, or conclusions contained in the Research. CAC North America further advises that
this Research is solely intended to be delivered to customers of CAC North America who qualify as Major U.S. institutional investors as defined in Rule 15a-6 of the Securities and Exchange Act of 1934, as amended (CAC North
America Customers). CAC North America Customers are restricted from re-delivering the Research to any other entity, and shall be held strictly liable for any and all costs, legal fees, damages, fines, or penalties resulting from any
re-delivery of the Research to persons or entities other than CAC North America Customers. The existence of this Research, or CAC North Americas forwarding the Research to certain of its customers, shall not be deemed a
recommendation or endorsement by CAC North America of the Research, a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed in the Research.
2. In the United Kingdom, this report is approved and/or distributed by Crdit Agricole Cheuvreux International Ltd which is authorised by the Financial Services Authority (FSA).
3. In Italy, this Research is approved and/or distributed by Crdit Agricole Cheuvreux SA and is not intended for circulation or distribution either to the public at large or to any other parties other than professional clients and/or
qualified counterparties, as defined in Legislative Decree No.58 of 24 February 1998 as amended, and implementing Consob regulations.
4. In Turkey, this document is based on information available to the public. CA Cheuvreux Menkul Degerler A.S. has spent reasonable care in verifying the accuracy and completeness of the information presented within the
document and cannot be held responsible for any errors, omissions or for consequences arising from the use of this information. The information should not be construed, implicitly or explicitly, as constituting investment advice.
This document is not an offer to buy or sell any of the securities discussed herein and has been prepared for the qualified representatives of our institutional investors.
5. In Germany this report is approved and/or distributed by Crdit Agricole Cheuvreux S.A. Niederlassung Deutschland (authorised and regulated by Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin)).
THE DISTRIBUTION OF THIS DOCUMENT BY CA CHEUVREUX IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS DOCUMENT COMES SHOULD INFORM
THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. BY ACCEPTING THIS REPORT YOU AGREE TO BE BOUND BY THE FOREGOING INSTRUCTIONS.
CLSA DISTRIBUTION
1. In the United States this report is distributed by CLSA solely to persons who qualify as Major Institutional Investors (as defined in Rule 15a-6 under the U.S. Exchange Act of 1934 as may be amended from time to time) and
who deal with Credit Agricole Corporate & Investment Bank.
2. In the United Kingdom, this report is distributed by CLSA (UK) (which is authorised by the Financial Services Authority (FSA).
3. In Australia this publication/ communication is distributed by CLSA Australia Pty Ltd;
4. In Hong Kong this publication/ communication is distributed by CLSA Research Ltd;
5. In India this publication/ communication is distributed by CLSA Ltd. (Address: 8/F, Dalamal House, Nairman Point, Mumbai 400021. Tel No: +91-22-66505050. SEBI Registration No: BSE Capital Market Segment:
INBO10826432; BSE F&O Segment: INFO10826432; NSE Capital Market Segment: IN230826436; NSE F&O Segment: INF230826436);
6. In Indonesia this publication/ communication is distributed by PT CLSA Indonesia;
7. In Japan this publication/ communication is distributed by Credit Agricole Securities Asia B.V. Tokyo Branch, a member of the JSDA licensed to use the CLSA logo in Japan;
8. In Korea this publication/ communication is distributed by CLSA Securities Korea Ltd;
9. In Malaysia this publication/ communication is distributed by CLSA Securities Sdn Bhd;
10. In the Philippines this publication/ communication is distributed by CLSA Philippines Inc. (a member of Philippine Stock Exchange and Securities Investors Protection Fund);
11. In Thailand this publication/ communication is distributed by CLSA Securities (Thailand) Limited;
12. In Taiwan this publication/ communication is distributed by CLSA Limited, Taipei Branch.
13. In Singapore this publication/ communication is distributed through CLSA Singapore Pte Ltd solely to persons who qualify as Institutional, Accredited and Expert Investors only, as defined in s.4A(1) of the Securities and Futures
Act, Pursuant to Paragraphs 33, 34, 35 and 36 of the Financial Advisers (Amendment) Regulations 2005 with regards to an Accredited Investor, Expert Investor or Overseas Investor, sections 25, 27 and 36 of the Financial Adviser
Act shall not apply to CLSA Singapore Pte Ltd. MICA (P) 168/12/2009
THE DISTRIBUTION OF THIS DOCUMENT BY CLSA IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES
ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. BY ACCEPTING THIS REPORT YOU AGREE TO BE BOUND BY THE FOREGOING INSTRUCTIONS.
The analysts/contributors to this publication/ communication may be employed by a Credit Agricole/ CA Cheuvreux company which is different from the entity that distributes the publication/ communication in the respective
jurisdictions.
CLSA has not provided any contribution nor made any modifications to this publication.
The MSCI indexes are the exclusive property of MSCI Inc. (MSCI). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by CA CHEUVREUX. The
financial securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such financial securities. The Prospectus contains a more detailed description of the limited
relationship MSCI has with CA CHEUVREUX and any related financial securities. No purchaser, seller or holder of this product, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to
sponsor, endorse, market or promote this product without first contacting MSCI to determine whether MSCIs permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the
prior written permission of MSCI.
The Dow Jones GCC IndexSM, or other applicable index, are calculated, distributed and marketed by Dow Jones & Company, Inc. , a licensed trademark of CME Group Index Services LLC ("CME"), and have been licensed for use.
All content of the Dow Jones IndexesSM 2012 Dow Jones & Company, Inc.
No part of this report may be reproduced in any manner or redistributed without the prior written permission of CA Cheuvreux.

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