Telecom Italia: Board of Directors examines and approves Group Interim Report on Operations at 30 September 2009

• BERNABÈ: “TELECOM ITALIA CONTINUES ON THE PATH OUTLINED A YEAR AGO OF FOCUSSING ON ITS CORE MARKETS, PROFITABILITY AND CASH GENERATION. THE STABILIZING OF EBITDA WAS MAINLY DUE TO THE PROFITABILITY OF THE DOMESTIC MARKET. THE SALE OF 100% OF HANSENET ALLOWS THE GROUP TO ACCELERATE THE REDUCTION OF ITS NET DEBT”

• AGREEMENT IN PRINCIPLE SIGNED FOR THE SALE OF HANSENET TO TELEFONICA FOR €900 MILLION. CLOSING OF THE TRANSACTION IS EXPECTED IN Q1 2010

In Q3 2009, as the result of the planned sale, the company HanseNet was classified under Discontinued Operations

The Organic figures with HanseNet classified in Discontinued Operations and the organic figures for the domestic market are reported in Tables on pages 2 and 3. For consistency of information and for comparison purposes the organic data restated with Hansenet consolidated line-by-line is presented in the Group results

FIRST NINE MONTHS OF 2009

REVENUES: €20,188 MILLION, -6.2% COMPARED TO THE FIRST NINE MONTHS OF 2008; -4.4% ORGANIC VARIATION

EBITDA: €8,526 MILLION, +1.5% COMPARED TO THE FIRST NINE MONTHS OF 2008, -0.4% ORGANIC VARIATION

ORGANIC EBITDA: €8,614 MILLION (-0.4% IN ORGANIC TERMS COMPARED WITH THE SAME PERIOD THE PREVIOUS YEAR)

ORGANIC EBITDA MARGIN: 42.7% (40.9% AT 30 SEPTEMBER 2008); +1.8 pp

NET INCOME: €1,165 MILLION, A REDUCTION OF €578 MILLION COMPARED TO THE FIRST NINE MONTHS OF 2008 MAINLY DUE TO THE EFFECT OF THE HANSENET GOODWILL WRITEDOWN FOR €540 MILLION AIMED AT ALIGNING HANSENET’S BOOK VALUE TO ITS ESTIMATED SALE VALUE

NET FINANCIAL DEBT WAS €35,506 MILLION (€34,039 MILLION AT THE END OF 2008); COMPARED TO 30 SEPTEMBER 2008 (€35,770 MILLION) A FALL OF €264 MILLION

In order to better present the ORGANIC figures, the key financial highlights and relating restated data (with HanseNet consolidated line-by-line) are shown below:

*includes the HanseNet goodwill write-down for €540 million

THIRD QUARTER 2009

REVENUES: €6,764 MILLION (-5.6%IN ORGANIC TERMS COMPARED TO THE SAME PERIOD THE PREVIOUS YEAR)

EBITDA: €2,979 MILLION (-1.1% COMPARED TO THE SAME PERIOD THE PREVIOUS YEAR)

ORGANIC EBITDA: €2,990 MILLION (-0.4% IN ORGANIC TERMS COMPARED TO THE SAME PERIOD THE PREVIOUS YEAR)

ORGANIC EBITDA MARGIN: 44.2% (41.8% IN THE SAME PERIOD THE PREVIOUS YEAR); +2.4 pp THANKS IN PARTICULAR TO THE SIGNIFICANT IMPROVEMENTS IN THE DOMESTIC MARKET AND THE UNCHANGING MARGINS IN BRAZIL

In order to better present the ORGANIC figures, the key financial highlights and relating restated data (with HanseNet consolidated line-by-line) are shown below:

*includes the HanseNet goodwill write-down for €540 million

The results of the first nine months of 2009 will be illustrated to the financial community during a conference call scheduled at 5pm (Italian time). The Press will be able to follow the presentation via telephone by calling +39 06 33168. Those unable to connect live may follow the presentation by calling: +39 06 334843 (access code. 266684#, until Thursday 12 November.

This press release contains alternative performance indicators not contemplated under IFRS accounting standards (EBITDA; EBIT; Organic Difference in Revenues, EBITDA and EBIT; Net Financial Borrowings and Adjusted Net Financial Borrowings). These terms are defined in the Appendix.
The Telecom Italia Group Interim Financial Statements for the first nine months of 2009 were drafted in accordance with Art. 154-ter (Financial Reports) of Legislative Decree No. 58/1998 (the Unified Finance Law or TUF) and subsequent amendments thereof and additions thereto, and in compliance with CONSOB Communication No. DEM/8041082, issued on April 30, 2008 (Quarterly Company Disclosures By Listed Share Issuers for Which Italy is the Member State of Origin).
The Interim Financial Statements have not undergone an external audit. They were drafted in compliance with the international accounting principles issued by the International Accounting Standards Board and approved by the European Union (“IFRS”).
The Interim Financial Statements were prepared using the same accounting principles and consolidation criteria adopted for the Consolidated Accounts of the Telecom Italia Group at December 31, 2008, which shall be used for reference purposes, with the sole exception of the new Principles/Interpretations adopted by the Group since January 1, 2009 and illustrated when announcing the 2008 Final Accounts.
Furthermore, following the retrospective implementation of IFRIC 13 (Customer Loyalty Programmes), comparative data of the corresponding periods of the 2008 fiscal year were restated accordingly. The main effects of such restatement are disclosed in the Appendix. Also, following the implementation of IFRS8 the expressions “business sector” and “business unit” are to be construed as having the same meaning in this press release.
This press release, particularly the section “Outlook for the 2009 financial year, contains forward-looking statements about the Group’s intentions, beliefs and current expectations with regard to its financial results and other aspects of operations and strategies. Readers should not place undue reliance on such forward-looking statements, as final results may differ significantly from those contained in such statements owing to a number of factors, the majority of which are beyond the Group’s control.

The Telecom Italia Board of Directors, chaired by Gabriele Galateri di Genola, today examined and approved the Group’s interim Report on Operations at 30 September 2009

Franco Bernabè, CEO of Telecom Italia, said: “The company continues on the path outlined in the Industrial Plan focussing on its core markets and on increasing profitability as well as cash generation. In particular, the effectiveness of actions to revise Revenue composition and operations to control costs is confirmed in the stabilising of organic EBITDA and in the significant improvement in percentage margins, reaching approximately 44% in the third quarter 2009”.

Bernabè added that ”The first nine months of 2009 closed with an operating cash flow of €3.9 billion, an increase of more than €500 billion, thanks to the above mentioned efficiency actions and strict financial discipline. The non-strategic asset disposal process is also underway with the sale of 100% of HanseNet which will allow the Telecom Italia Group to accelerate the reduction of its net debt”.

TELECOM ITALIA GROUP

Changes to the consolidation area: In Q3 2009, following the planned sale of HanseNet Telekommunikation GmbH (a German broadband carrier), the Group’s stake in this company was posted under Discontinued Operations. Pursuant to IFRS 5 (Non-Current Assets Held for Sale and Discontinued Operations), the company’s economic performance in the first nine months of 2009 and in Q3 2009, as well as in the corresponding periods of the 2008 fiscal year, were placed under an ad-hoc P&L item called “Income (losses) from Discontinued Operations/Assets Held for Sale”. Capital-related results at September 30, 2009 are displayed as two separate items of the consolidated balance sheet.
Furthermore, Telecom Media News S.p.A. has been excluded from the consolidation area since May 1, 2009, following the sale of a 60% stake in it by Telecom Italia Media S.p.A.
The main 2008 changes were as follows:

• exclusion of Entel Bolivia starting in Q2 2008, following its nationalisation pursuant to a Decree issued by the Bolivian Government on May 1, 2008. This stake can now be found under Current Assets;
• exclusion of the “Pay-per-View” business starting December 1, 2008, following its sale by Telecom Italia Media S.p.A..

Revenues in the first nine months of 2009 were down by 6.2% at €20,188 million from €21,520 million in the same period in 2008 (-€1,332 million). In organic variation terms, the fall in consolidated revenues was 4.4% (-€925 million).
In detail, the organic variation in revenues is calculated by excluding:

• the effect of variation in the consolidation area (-€55 million, caused mainly by the exit of Entel Bolivia in 2008 Q2);
• the effect of exchange rate variations (-€370 million, caused by the balance between the losses of €385 million incurred by Business Unit Brazil and the gains of €15 million flowing in from the other Business Units);
• other non-organic revenues of €6 million in the first nine months of 2009 (€24 million in the first nine months of 2008).

Revenues, broken down by business unit, are as follows:

The Domestic Business Unit (divided into Core Domestic and International Wholesale) has suffered overall the impact of a down beat market in the first nine months of the year, although the fixed telephony business was affected less severely than mobile telephony where revenues have fallen compared with the previous quarters.

In particular the evolution in Core Domestic Revenues (containing all telecommunications activities in the Italian market, also illustrated in segment reporting) during the first nine months of 2009 presents the following features:

• a fall in revenues in the Consumer segment (-€674 million, -7.5%) mainly due to low margin business areas (products from the mobile segment -€220 million; content from the mobile segment -€50 million), while the broadband component grew both in fixed line (+€86 million, +13%) and in mobile (+€51 million, +21%);
• a reduction in revenue in the Business segment (-€289 million, -9,3%), that was more severely affected than the other segments, by the decrease in consumption stemming from a bearish market and by the negative asymmetries of competition in fixed telephony, particularly regarding procedures for win-backs. Nevertheless this scenario also highlighted positive trends such as stable fixed line internet revenues and the constant growth of revenues from mobile browsing;
• a limited reduction (-4.0%) in the Top Clients segment, buoyed by strong ICT packages and solutions growth (+15.2%), mobile sales have remained stable and the fixed business decreased;
• a noteworthy rise (+€224 million, +17.4% in organic terms) in the National Wholesale segment generated by the growth in the alternative operators customer base.

Regarding the Group’s Brazilian operations, organic revenues have risen 1.0% as a result of good performance by VAS revenues and products propelled by the growth in customer base (+€3.2 million lines compared with the end of 2008).

In Q3 2009 revenues amounted to €6,764 million (compared to € 7,273 million in Q3 2008), down 7.0% from the same period of 2008. Excluding the effect of exchange rate fluctuations (minus €97 million, mainly from the Brasil Mobile business unit) and of changes to the consolidation area (minus €2 million), the organic change in revenues dropped by 5.6%.

EBITDA stood at €8,526 million, up 128 million (+1.5%) compared to the same period of 2008. In organic terms, EBITDA remained basically stable at -€32 million (-0.4%). In the first nine months of 2009 the EBITDA margin was 42.2% versus 39% in the first nine months of 2008. On an organic level, the EBITDA margin was 42.7% in the first nine months of 2009, up 1.8% from the same period of the previous year (40.9%).

The following table shows a breakdown of EBITDA and EBITDA margin by business unit:

In Q3 2009 EBITDA amounted to €2,979 million, down 1.1% from €3,011 million in Q3 2008. In organic terms, EBITDA remained basically stable (-€12 million, or -0.4%).

EBIT stood at €4,293 million, up 148 million compared to the first nine months of 2008 (+3.6%). The organic change in EBIT was negative by €21 million (-0.5%).
The EBIT margin went from 19.3% in the first nine months of 2008 to 21.3% in the first nine months of 2009; in organic terms, the EBIT margin was 21.9% in the first nine months of 2009 (compared to 21.1% in the same period of the previous year).

In Q3 2009, EBIT stood at €1,608 million, up 1.8% from €1,579 million in Q3 2008. The organic change in EBIT was 1.3% (+€20 million).
The EBIT margin was 23.8% (compared to 21.7% in Q3 2008); from an organic standpoint, in Q3 2009 the EBIT margin was 23.8% (compared to 22.1% in the same period of the previous year).

An effective management of financial transactions and equity investments, as well as a good operating Performance, resulted in a €419-million increase in income before taxation (+18.6%) compared to the same period of the previous year. Total income before taxation was €2,676 million.

Consolidated net income amounted to €1,165 million, down 578 million from the first nine months of 2008, driven mainly by a €540-million write-down of the goodwill of the broadband business in Germany, aimed at aligning HanseNet’s book value to its estimated sale value.

Capex for the first nine months of 2009 amounted to €2,998 million (down 730 million compared to the first nine months of 2008) and was broken down as follows:

In the first nine months of 2008 capex included €477 million for the buying of mobile telephony licenses to be allocated to the 3G service of the Brasil Mobile business unit. When purged of this amount, the reduction in capex was affected by the Reais/Euro exchange rate (-€58 million) and by the impact of the cost reductions & investment plans started in 2008.

Net financial debt stood at €35,506 million, up 1,467 million from December 31, 2008.
In order to better represent the real picture of net financial debt, as early as June 2009 it was deemed necessary to introduce a new measure under the heading “adjusted net financial debt”. This item excludes the purely accounting, non-monetary effects stemming from the valuation at fair value of derivatives and related financial assets/liabilities. As a matter of fact, the valuation of derivative financial instruments, which are designed – among other things – to pre-set the exchange and interest rates of future variable contracts does not actually require any financial regulation.

Adjusted net financial debt stood at €35,093 million, up 567 million from the €34,526 million posted at 31 December 2008.

In Q3 2009 adjusted net financial debt increased by €234 million. The effects of the good operational perfomance were offset by taxes paid for €1.3 billion.

Cash flow from operations in the first nine months of 2009 amounted to €3,932 million - a €515-million improvement compared to the first nine months of 2008, as a consequence of a basically stable operating margin and of effective cost-control and investment monitoring/selection actions.

At September 30, 2009 the Group’s headcount, already excluding HanseNet employees (Discontinued Operations), stood at 72,560 employees, of whom 62,485 in Italy.

BUSINESS UNIT RESULTS

Figures for the Telecom Italia Group included in this press release refer to the following business units:

• business unit Domestic: includes domestic fixed-line and mobile-line voice and data services provided to end users (retail) and other carriers (wholesale), as well as associated support operations;
• business unit Brasil: refers to telecommunications operations in Brazil;
• business unit Media: includes TV network-related activities and operations;
• business unit Olivetti: focuses on the development and manufacturing of digital printing systems and office products;
• Other Operations: includes financial firms and other smaller operations not strictly related to the core business of the Telecom Italia Group.

Following the inclusion of HanseNet among Discontinued Operations in Q3 2009, the European BroadBand business unit has been removed. The other companies originally included in that business unit have been moved under “Other Operations” In order to make a proper comparison possible, segment reporting for comparable periods has been restated accordingly.

Figures for Telecom Italia Media at September 30, 2009 can be found in the press release issued on November 3, 2009 after the Board Meeting of the company that approved them.

DOMESTIC
Revenues amounted to €16,233 million, down 5.2% (-€886 million) compared to the first nine months of 2008. The organic change was -5.4%.
Highlights:

Core Domestic
Core Domestic revenues stood at €15,415 million, down 5.4% (-€881 million) compared to the same period of 2008. The organic change was -5.5%.

The following highlights the performance of individual market segments as compared to the same period of 2008:

• Consumer: Revenues were down by €674 million (-7.5%) as a consequence of: lower revenues from fixed-line telecommunications (-€156 million, or - 8%) and outgoing mobile traffic (-€147 million, or -12%), resulting mainly from a reduction in the customer base; the impact of new pricing policies for regulated interconnection rates, with special emphasis on mobile termination revenues (-€124 million, of which €92 million resulting from a reduction in rates); lower revenues from traditional value-added services (messaging was down by €51 million, or -8%) and contents (-€50 million, or -25 %); lower product sales volumes (-€220 million, of which €192 million from mobile devices). The performance of traditional business segments was partially offset by a growth in the customer base and by revenues from broadband services on both fixed-line (+€86 million, or +13%) and mobile communications (+€51 million, or +21%);
• Business: Revenues were down by €289 million (-9.3%), mainly as a consequence of the prolonged crisis that is hitting SMEs and causing their consumption to decline. Both business segments posted a significant drop. Fixed-line telecommunications were down 11% from the same period of 2008 but remained in line with previous quarters, whereas mobile communications were down 8%. However, revenues from fixed-line Internet use remained stable and revenues from mobile browsing grew (+26% in Q3 2009 compared to the same period of 2008);
• Top: Revenues were down by €112 million (-4.0%) as a result of three different trends: a strong growth of the ICT solutions and offerings business (+15.2%), where market share rose from approx. 7% in September 2008 to 11% in September 2009; an improved performance of the mobile business (which experienced a 1.4% growth in Q3 2009); a physiological decline of the fixed-line business, partially as a result of the current economic scenario and of the associated decreased consumption in the corporate world;
• National Wholesale: Revenues were up by €224 million, or +17.8% (+17.4% in organic terms), driven by the growth of OLOs’ (Other Licensed Operators’) Local Loop Unbundling, Wholesale Line Rental and Bitstream customers.

International Wholesale
In the first nine months of 2009 the International Wholesale business segment (Telecom Italia Sparkle Group) posted revenues in the amount of €1,298 million, down 59 million from the same period of 2008 (-4.3%) following a decline in voice services in both the captive and the third-party market. The good performance of the IP/Data, Multinational Corporations and Consulting businesses partially offset the above-mentioned decline in voice services.

Fixed-Line Telecommunications
Revenues amounted to € 10,964 million, down 164 million (-1.5%) from the same period of 2008. The organic change in revenues was negative by €198 million (-1.8%).
At September 30, 2009 retail accesses stood at approx. 16.4 million (-994,000 compared to December 31, 2008). The wholesale customer portfolio increased, with approx. 5.9 million accesses at September 30, 2009 (+953,000 compared to December 31, 2008). The total access market remained basically stable compared to December 2008.
At September 30, 2009 the total broadband portfolio amounted to 8.6 million accesses (+433,000 compared to December 31, 2008), broken down into 6.9 million retail accesses and 1.7 million wholesale accesses.

Retail Voice
Revenues from the Retail Voice business amounted to €5,140 million, down 548 million (-9.6%) from the first nine months of 2008.
Revenues from all market segments suffered a physiological reduction in both customer base and traffic volumes as a consequence of a very competitive operating environment. Additional factors were a decline in regulated fixed-to-mobile termination rates and the disabling of a number of Premium services executed by the company on both a compulsory and voluntary basis (the decline in revenues from VAS services compared to the same period of 2008 amounted to €40 million). However, the economic impact of lower access revenues (-€141 million) in the domestic business segment despite the increase in line rental fees that became effective on February 1, 2009 was offset by the good performance of wholesale services (+€134 million from regulated intermediate services such Local Loop Unbundling and Wholesale Line Rental).

Internet
Revenues from the Internet business segment amounted to €1,263 million, up 55 million compared to the same period of 2008. The Narrowband component declined even further and currently accounts for a mere 2% of total revenues. The total retail Broadband portfolio reached 6.9 million accesses on the domestic market, up 167,000 accesses from the end of 2008. Flat-rate customers now account for 81.5% of total retail Broadband customers (compared to 77% at the end of 2008). Also on the rise are the IPTV service in the Consumer segment, with a portfolio of 405,000 customers to date (+76,000 compared to the end of 2008) and the Web-based offerings and services provided through the Virgilio portal. The Alice Casa package has 488,000 customers (+370,000 compared to December 31, 2008) and accounts for 7.1% of the total Broadband portfolio (it was 1.7% at December 2008).

Business Data
Revenues from the Business Data segment amounted to €1,222 million, up 4 million (0.3%) compared to the first nine months of 2008, driven by the good performance of ICT products and services, with special emphasis on the service component.

Wholesale
At the end of September 2009 the customer portfolio of Telecom Italia’s Wholesale division consisted of approx. 6.2 million accesses for voice services and 1.6 million accesses for Broadband services. As a whole, revenues from Wholesale services amounted to €3,057 million, up 294 million compared to the same period of 2008 (+10.6%). Revenues from this business segment are related to the growth of OLOs’ customers served through different access types.

Mobile Telecommunications
Revenues for the first nine months of 2009 amounted to €6,496 million, down 589 million (-8.3%) compared to the first nine months of 2008. This decline can be ascribed to a reduction in the number of handsets sold, to shrinking sales of traditional value-added services (text messages) and contents, as well as to changing trends in regulated interconnection rates.

At September 30, 2009 Telecom Italia supplied approx. 31.9 million mobile lines. This decline from December 31, 2008 can be ascribed to a more selective commercial policy that places special focus on high value-added customers and to the discontinuation of silent lines. Post-paid lines accounted for approx. 20% of total lines, compared to approx. 17% at December 31, 2008.

EBITDA amounted to €7,712 million, up 139 million from the same period of 2008 (+1.8%). The EBITDA margin was 47.5%, up 3.3 percentage points compared to the same period of 2008.
The organic change in EBITDA compared to the first nine months of 2008 was negative by €145 million (-1.8%), with the EBITDA margin standing at 47.8% (compared to 46.1% in the same period of 2008).

EBIT amounted to €4,298 million, up 111 million (+2.7%) from the same period of 2008, with the EBIT margin standing at 26.5% (compared to 24.5% in the first nine months of 2008). The organic change in EBIT was negative by €106 million (-2.4% compared to the same period of 2008).

Capex amounted to €2,418 million, down 228 million from the same period of 2008. The capex margin was 14.9% (compared to 15.5% in the first nine months of 2008). This decline was mainly a consequence of lower investments in handsets (either rentals or linked to multi-year contracts) and of the optimisation and rationalisation of network investments governing BroadBand Access, Core Platform and Control, Service and Application Platform.

Headcount amounted to 60,298 employees, down 1,518 units from December 31, 2008.

BRASIL MOBILE
(average real/euro exchange rate: 2.83709)

As at September 2009 the TIM Brasil Group supplied 39.6 million lines (+12.5% compared to the end of September 2008; +8.8% compared to December 31, 2008), corresponding to a market share of 23.8%.

Revenues for the first nine months of 2009 amounted to 10,275 million reais, up 1.0% (+97 million reais) from the same period of 2008. Revenues from products increased by 21.7% and revenues from VAS grew by 21.3%. Average monthly revenues per customer amounted to 28.0 reais in September 2009, compared to 31.5 reais in September 2008. Key business indicators levelled off in the last quarter, following a positive contribution by the post-paid customer base and the success of the new prepaid offerings.

EBITDA for the first nine months of 2009 amounted to 2,410 million reais, up 7.5% (+169 million reais) from the same period of 2008.The EBITDA margin was 23.5%, up 1.5 percentage points from the same period of 2008. This result was made possible by efficiency-improving actions aimed at generating resources to be used to finance business growth and the commercial boosting of Tim Brasil. Compared to the same period of 2008, the organic change in EBITDA amounted to +257 million reais, with the EBITDA margin standing at 24.3% (compared to 22.0% in the first nine months of 2008).

At September 2009 EBIT stood at 242 million reais (compared to 183 million reais in the same period of 2008). This result can be ascribed to an improved EBITDA compared to the first nine months of 2008, partially offset by depreciation & amortisation related to the 3G licence acquired in the second quarter of 2008, by capex associated to the new UMTS network and by actions aimed at preserving the capacity and quality of the 2G network. Compared to the same period of 2008, the organic change in EBIT was positive by 147 million reais, with EBIT margin standing at 3.2% (compared to 1.8% in the first nine months of 2008).

Capex for the first nine months of 2009 amounted to 1,530 million reais (compared to 2,749 million reais in the first nine months of 2008), a decline by 1,219 million reais mainly due to the acquisition of the 3G licence in 2008.

At September 30, 2009 the company employed 9,319 people, 966 less than at December 31, 2008.

OLIVETTI

Revenues in the first nine months of 2009 were €219 million down by €33 million compared to the same period in 2008 (-13.1%).

EBITDA has posted a negative result of €18 million, an improvement of €5 million euro compared to the same period in 2008 thanks to a significant reduction in fixed costs.

EBIT, has posted a negative result of €22 million euro, an improvement of €6 million compared to the same period 2008.

Capex in the first nine months of 2009 was €3 million, an increase of €1 million compared to the same period the previous year.

The company employed 1,101 people at 30 September 2009, falling by 93 people compared to 31 December 2008.

Q3 results divided by business unit

OUTLOOK FOR THE 2009 FINANCIAL YEAR

With regards to the performance of the Telecom Italia Group in the current fiscal period, based on the results posted in the first nine months of 2009, the profitability targets are confirmed:

• Business Unit Domestic: organic EBITDA €9.9-10 billion;
• Business Unit Brazil: organic EBITDA ~ 3.6 billion reais;

The Group also expects to reach an adjusted net financial debt at the end of 2009 of around €34 billion not taking into account the positive effects of the sale of HanseNet expected in the first quarter of 2010.

***

EVENTS SUBSEQUENT TO 30 SEPTEMBER 2009

HanseNet
Consistently with the gradual increase of focus on core markets announced in December 2008, in today’s meeting the Board of Directors approved the sale of HanseNet Telekommunikation GmbH.

HanseNet (a subsidiary fully owned by Telecom Italia S.p.A. through Telecom Italia Deutschland Holding GmbH) is a German retail broadband carrier. At the end of 2008 it had 2.3 million broadband customers and approx. 0.5 million of dial-up customers. The data prepared for the Telecom Italia Group consolidated accounts are as follows: 2008 revenues amounted to €1,190 million (€858 million in the first nine months of 2009). In 2008 EBITDA stood at €238 million (€196 million in the first nine months of 2009), with net income at - €9 million (-€19 million at September 30, 2009). At the end of 2008 net debt (NFP) was €526 million (€610 million at September 30, 2009) and consisted basically of inter-company loans. The headcount was 2,505 employees at the end of 2008 (compared to 2,283 at September 30, 2009).

Given the size and infrastructural characteristics of competitors, the competitive scenario of the German broadband market and its future outlook make a successful long-term strategic positioning difficult in the absence of heavy investments whose return would be uncertain. Consequently, the dismissal of the company is part of a strategic approach of financial rigor, aimed at enhancing cash flow generation and at shifting focus to core markets.

A dismissal process that involved a number of potential buyers was started with the support of Morgan Stanley Bank International Limited (Milan branch). The process eventually resulted in an agreement with Telefónica S.A., a party related to Telecom Italia through Board Members Cesar Alierta and Julio Linares (the President and the Chief Executive Officer of Telefónica S.A., respectively). In turn, Telefónica S.A. owns 42.3% of the total equity of Telco S.p.A., Telecom italia’s main shareholder, with a stake that currently accounts for 24.5% of Telecom Italia’s ordinary share capital.

The sale price agreed upon by the company’s management results from HanseNet’s enterprise value of € 900 million.

The fairness of the economic terms and conditions of the sale has been confirmed, from a financial point of view, in a fairness opinion by the company’s advisor Morgan Stanley, which acted as a financial advisor based on a mandate given to it by Telecom Italia’s Chief Executive Officer. For the services rendered, Morgan Stanley will be paid a success fee in line with market practices.

Due to its size and value, the HanseNet dismissal is a strategic transaction that requires the prior approval of the Board pursuant to the corporate Code of Conduct. Furthermore, Telecom Italia’s Code of Conduct requires that, in the case of transactions with related parties to be approved by the Board, the submission of the proposal to the Board be subject to the opinion of an Internal Control and Corporate Governance Committee made up solely of non-executive directors, the majority of whom shall be independent, and at least one of whom shall belong to a minority list. The present members of the Committee are Paolo Baratta (Chairman of the Committee and Lead Independent Director), Roland Berger, Jean Paul Fitoussi and Aldo Minucci.

The Committe (Director Roland Berger was absent) reviewed the proposed sale to Telefónica with the support of a financial advisor of its own choosing, namely Barclays Capital (the investment banking division of Barclays Bank PLC), which stated that its economic, capital and financial relationships with Telecom Italia Group and the buyer are not enough to impair its independence relating to its role. The review undertaken by the Committee focused on verifying compliance with procedural and actual fairness criteria during the construction of the deal. Neither the decision to dismiss the company nor the counterparty selection process or the negotiation method were found to have been affected by Telefónica being a related party. Furthermore, the fairness of the economic terms and conditions of the agreement was confirmed by Barclays Capital, which limited its scope of action to a financial assessment of the sale price and confirmed that it falls into a valuation range calculated with a number of methods frequently used in similar situations. Pursuant to its mandate, Barclays Capital was involved neither in the negotiations nor, more generally, in the sale process. Its advisory support was provided solely to the Committee. For the services rendered, Barclays Capital will be paid a fixed fee regardless of the outcome of the deal, in line with market practices.

The Committee expressed its opinion that the process was compliant and resolved to submit the proposal to the Board of Directors which (Board members Cesar Alierta, Julio Linares and Gaetano Miccichè were absent) approved it by majority of the participants.

Board Member Zingales pointed out that he was satisfied about the fairness and completeness of the process followed, with special emphasis on compliance with the regulation of relationships between related parties. However, he personally thought a full agreement with the proposal would require a more detailed knowledge of the business prospects on his part. Consequently he did not vote in favour of the proposal.

The HanseNet valuation contained in the above-mentioned fairness opinions issued by Morgan Stanley and Barclays Capital was performed on the current composition of the company and was based on the main methods commonly used in market practice, and especially:

• Discounted Cash Flow (DCF), which was used as the main method;
• Control valuation methods include:
  • market multiples of comparable companies applied to 2009 and/or 2010 estimates. The listed comparable companies used as a reference were mainly United Internet, Versatel and QSC;
  • multiples of previous transactions applied to the number of customers and/or 2009 EBITDA estimates. The transactions taken into account include European deals closed in the past 12 months on companies operating in the Broadband business, such as the acquisition of Tiscali UK by Carphone Warehouse in the UK and the acquisition of Freenet by United Internet in Germany.

The Telecom Italia code of conduct does not impose abstention or the exit of Board members who have a vested interest in a resolution. However, when nominated, Board members Alierta and Linares undertook not to participate in the discussions and in voting during meetings of the Board (or of the Executive Committee) when proposals on matters related to Telecom Italia activities or those of its subsidiaries in the Brazilian or Argentinian telecommunications markets, as well as, more generally, in each case where there may damage to Telecom Italia Group. This decision was acted upon by including the HanseNet dismissal process in a separate agenda consisting solely of the topics board members Alierta and Linares were not been invited to discuss.

The termsheet of the sale was signed following the Board’s resolution. The closing of the deal is expected to take place in Q1 2010, provided all the necessary authorizations are received.

Since the book value of HanseNet was aligned to the estimated value of the deal, only a very minor – if any – further impact on Telecom Italia Group’s P&L account is expected, following the adjustments that can typically be required by this type of transactions.

Bond Issue
The decision on the sale of HanseNet deliberated today allows for a significant cash-in which makes further tapping of the bond market unnecessary.

The Manager designate for the preparation of accounting and corporate documents, Marco Patuano, hereby declares, pursuant to paragraph 2, Art.154-bis of Italy’s Financial Law, that the accounting information contained herein corresponds to the company’s documentation, accounting books and records.