LONDON --

Telefonica's

(TEF) - Get Report

Chairman Juan Villalonga is turning out to be Spain's

Bill Clinton

.

Despite the popularity of his policies among institutional money managers, scandals continue to dog the executive and could ultimately drive him out of office. With Telefonica directors gathering for the company's monthly board meeting in Madrid Wednesday, speculation is rife that impeachment proceedings are under way.

Miguel Garzon, director of international communications for Telefonica, declined to say whether Villalonga's standing would be up for discussion at the board meeting, but he stressed the gathering was a regular monthly event with no set agenda. He also declined to comment on a renewed probe into Villalonga's share dealings, which prompted the latest round of damaging allegations against the executive.

While Villalonga's resignation or removal would be a setback for lessening government intervention in business -- a trend that is sweeping western Europe -- it wouldn't necessarily level the same blow to Telefonica's share price.

Ivan Arteaga, vice president of the

Gabelli Funds

, which owns several hundred thousand Telefonica shares, concedes that Villalonga's resignation would be "a slight negative for the company." But he adds that such a move wouldn't prompt him to sell his shares. In fact, Arteaga says he's looking to buy more Telefonica stock on any dip in price, because "the fundamentals of the company as a whole are still very strong, it has attractive assets and it's well positioned strategically."

Under Villalonga's direction, Telefonica shares traded in New York have appreciated about 260% since June 1996. The broad

S&P 500

, by contrast, has turned in a 116% rise for the same period, while the S&P telephone subindex, of which Telefonica is a component, was up 99%. On Tuesday, Telefonica shares traded up 3 7/16, or 6%, to $61.

Earnings are expected to grow to 2.61 billion euros ($2.47 billion) by fiscal 2001, up from 1.79 billion euros last year, on revenue that is forecast to jump 21% to 16.45 billion euros.

"The Telefonica story could now survive without Villalonga," says David George, an analyst with

J.P. Morgan

in London, who rates shares a buy with a 28-euro price target. (It's unclear whether J.P. Morgan has performed recent underwriting.) He says that he doesn't expect Wednesday's board meeting to lead to Villalonga's resignation, but has less confidence in the executive's longer-term prospects of remaining with the company.

Opposition to Villalonga, the former investment banker who transformed Telefonica from a state-run entity into a global telecommunications company, has been mounting for some time. Although Telefonica was privatized some years ago, the government still holds a golden share, which gives it veto power. Such influence makes Telefonica the target of all sorts of political machinations. For instance, Spain's socialist party, which has never come to terms with the idea that Villalonga could make so much money by running a once-lumbering government monopoly, has repeatedly attacked him in the press. In order to disassociate from that negative publicity, Spain's Prime Minister Jose Maria Aznar has distanced himself from Villalonga, a former school friend. Meanwhile, Villalonga's dumping of his wife (who happens to be a close friend of Aznar's spouse) for a much younger girlfriend hasn't won him much praise. All of which has left Villalonga as the odd man out in Spanish politics.

Then there is the share-options scheme, a relatively new idea for Spanish companies, and one that runs counter to the ingrained socialist strain. Reports in Spanish newspaper

El Mundo

have accused Villalonga of illegally profiting from Telefonica options he bought while the company was in merger negotiations with

WorldCom

(WCOM)

, which was then called

MCI WorldCom

. Now the regulatory agency,

CNMV

is investigating the incident again after first clearing Villalonga of all charges back in 1998.

"It is said that the stock market watchdog could accept that Mr. Villalonga had privileged information but that he cannot be legally blamed for it," noted a report from

Ibersecurties

, a Spanish brokerage that rates Telefonica a buy. (An underwriting relationship could not be determined at this time.) Such a finding would likely satisfy few.

With the official report not due for another two to three weeks, that should grant Villalonga a stay of execution at Wednesday's board meeting. It is understood that directors and major shareholders,

Banco Bilbao Vizcaya Argentaria SA

and

La Caixa

, are waiting for the CNMV's conclusions before taking a stance.

Over the longer term, however, Villalonga could well be fighting for his job. Should his political troubles continue to hamper Telefonica's ability to grow and prosper -- politics was the main sticking point behind the collapse of Telefonica's merger talks with Netherlands-based

KPN

(KPN)

-- it's possible that international money managers, his most ardent supporters, will lose their patience.

Yet, those who already count Villalonga out would be premature. "He is a scrappy person and a fighter," says Arteaga, the money manager. "The government

involvement might hamstring Telefonica in the short term, but in the long term I would expect the government to come under some pressure for being anti-free market."

Villalonga has made some progress in cutting Telefonica's government-held apron strings. That motivation was one reason behind "Operation Veronica," a restructuring of the company along business units as opposed to geographical lines, says one person familiar with the company who asked not to be named. Veronica is a bull-fighting term that means sleight of hand. In dividing Telefonica into different companies that could later be spun off -- offerings of

Telefonica Media

and

Telefonica Moviles

are expected later this year -- Villalonga is playing his own sleight of hand by diluting the government's influence.

Should the Spanish government eventually relinquish its golden share, Villalonga would then be swapping one set of demanding task masters, the government, for another, the public. Like Bill Clinton, at least he's shown he knows how to please the latter.