Bad Connections

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Oh, the sweet memories of summer. Just a few weeks ago, Telecom Italia's dashing chairman Marco Tronchetti Provera boarded Rupert Murdoch's private yacht off the Greek island of Zakynthos, seeking to buy media content from the Aussie-born mogul for Telecom's broadband service. Even more enticing was the possibility that Murdoch might want a stake in the [an error occurred while processing this directive] Italian company's mobile-phone unit, which would help lift it out of its €41 billion debt. At the very least, said Tarak Ben Ammar, Murdoch's go-to guy in Italy: "The water in Greece is really clean ... and the company was very good."

Meanwhile a bit farther north, Italian Prime Minister Romano Prodi had just wrapped up a notably more austere Mediterranean holiday in the Tuscan coastal town of Castiglione della Pescaia. Prodi could bask in several recent Italian successes on his beach break: a key role in the Lebanon cease-fire, and a merger of Sanpaolo IMI and Banca Intesa to give Italy its first major European banking player.

But by the second week of September the sunny summer spirit was fading. Telecom's announcement that it was splitting its fixed-line and mobile phone sectors — which could result in the sale of the latter — left investors cold. Two days later, a visibly incensed Prodi declared to a swarm of television cameras that Tronchetti Provera had kept him out of the loop about any planned sell-offs. The would-be statesman of Lebanon sounded like he could barely run his own country.

But the center-left leader's tone-deaf display was just the beginning of trouble. In the two weeks since, widespread doubts have been revived about Prodi's leadership skills and the government's commitment to economic reforms. Tronchetti Provera suddenly resigned on Sept. 15, followed by the resignation of Angelo Rovati, Prodi's top economic advisor. Then, last Wednesday, top Telecom security executives were arrested for allegedly heading a ring of illegal phone tapping. (No evidence has emerged that the bugging was linked to talks over Telecom's future.) Taken together, it has been a cold reminder that Sistema Italia, the totality of how economics and politics functions in the bel paese, is still a cumbersome load of conflicts of interest and arcane maneuverings that drag down the country and scare away foreign investors.

Prodi's behavior has been especially heavy-handed. In the midst of back-and-forth bickering about what the Telecom chief had told him, Prodi authorized the release of an official note recounting information shared in their two recent meetings — including market-sensitive information about Tronchetti Provera's negotiations with other companies. Even if he wasn't set on outright renationalizing Telecom, Prodi was clearly intent on putting his own stamp on its future.

Coalition partners insisted that the government had a right to be informed about the plans of such a strategic industrial player. Still, one government official did concede: "It's been a very bad week. We have to get out of this mess." Even more worrying is the stain it has left on the entire Italian economy. Murdoch, for one, told an investors' meeting that he's lost interest in any potential share swap with Telecom, reportedly frustrated by government meddling.

Tronchetti Provera's resignation as Telecom chairman, initially blamed on the spat with Prodi, is more likely just a case of finding a good time to bail. His five years at the helm of the fifth largest European telecom company were disappointing, and the recent lopping off of the mobile unit was a complete U-turn after it had been fused with the fixed-line only two years ago, contends Michele Pollo, chairman of the economics department at Milan's Bocconi University.

"It's hard to understand just what they have in mind, strategically," says Pollo. For now, Milanese lawyer Guido Rossi has stepped in as acting chairman. But with Tronchetti Provera still the controlling shareholder, the company must look hard for new investor blood. After the September fiasco, it could turn into a very cold winter.