By Mike Newlands
Although the directors of Deutsche Telekom and Telecom Italia have agreed on a merger of the two massive telecoms companies – which the out-of-sorts France Telecom insists with some justification on calling a takeover – former contender, Olivetti, is still not out of the picture.
The shotgun marriage-to-be between the still largely state-owned German ex-monopoly and the partially still-state-owned Italian ex-monopoly, was brought about through the latter trying to defend itself against a hostile takeover bid from the much smaller Italian private company, Olivetti – which for the past few years has been rapidly growing its own telecoms business.
Olivetti offered Telecom Italia’s shareholders a buy-out deal worth $65bn in February, but that wasn’t enough. So back came a new offer of 15% more, which has been, and still is, under consideration. Despite the agreement between Telecom Italia and Deutsche Telekom, Olivetti has been cleared by both Italian and European regulators to proceed with its bid.
It could take up to four months, however, for the European Commission to complete its own extensive investigation into the proposed mega-merger before deciding whether to let it go ahead. EU competition commissioner Karel van Miert told the European parliament: I would not be surprised if an in-depth investigation is necessary on the merger plans between Deutsche Telekom and Telecom Italia in view of the size of the operation. However, another commissioner, Martin Bangemann, told a news conference in Brussels that the proposed merger poses problems in a global market but these problems do not seem insurmountable.
And in the meantime, the two telcos and their financial advisers will have to work on persuading shareholders that shares in a new combined entity will be worth more to them than the combination of cash, shares and bonds offered by Olivetti. As one investment analyst put it, they will have to persuade Telecom Italia shareholders that Deutsche Telekom shares are worth having.
The proposal that the telcos’ boards have come up with is for a new holding company to be created, with a name yet to be decided, in which Deutsche Telekom shareholders will receive shares in the new company on a one-to-one basis, but Telecom Italia investors will receive one share for every three of their own (valuing Telecom Italia at about $81.4bn). As the German telco is 72% owned by the state, this means the German government will become by far the largest shareholder in what will be the world’s second largest telecommunications operation after Japan’s NTT in income terms, and the largest in size of both market capitalization and workforce.
The Italian government, which only has a 3.4% share in Telecom Italia but which has maintained a golden share allowing it to veto any merger, initially balked at the size of the German government holdings. Italian minister for post and telecommunications, Salvatore Cardinale, said publicly: We cannot be the poor relations of Deutsche Telekom. Some cabinet members are known to favor the Olivetti bid because it will keep everything in Italian hands. However, Deutsche Telekom quickly gave assurances that there would be no interference in the management or strategy of the proposed new group, and said the government shareholding would be sold off starting from next year in line with our privatization policy, as soon as possible and if market conditions allow it.
Meanwhile, France Telecom, which has a 2% stake in Deutsche Telekom, is highly disgruntled because it claims the German company is breaking the terms of agreements between the two. They are both shareholders, together with Sprint, in international private network provider Global One, and together with Italian electricity provider Enel, also owns Wind, which is Italy’s third largest mobile telephone operator after one of Olivetti’s subsidiaries. Deutsche Telekom CEO, Ron Sommer, had earlier insisted that the planned merger would not affect other partnerships. But a European commission source quoted in the British press said the commission considered Deutsche Telekom would be well advised to divest its stake in Wind in order to win merger approval.
France Telecom was more forthright and a company statement said: The proposed takeover of Telecom Italia by Deutsche Telekom, undertaken without any prior consultation with France Telecom, is a clear violation of the undertakings between France Telecom and Deutsche Telekom. France Telecom deplores this behavior and will undertake whatever action is appropriate to protect its rights and the interests of its shareholders.
If the various hurdles and hubris are finally surmounted, and a new company comes into being in the final quarter of this year as the two boards plan, it will not only be a mighty force in European telecoms but one with potential to be a truly international colossus.
Employing more than 300,000 people and with annual revenues of more than $62bn, it will have 72 million domestic access lines, 33 million mobile subscribers, a fifth of Europe’s on-line internet customers and operations reaching a quarter of Europe’s population, according to Telecom Italia’s CEO, Franco Bernabe.
It will also have twin headquarters in Rome and Bonn (although there are rumors which have not been denied of a single headquarters in the Netherlands), an equal number of directors from each side, with Sommer and Bernabe as joint CEOs. Shares would be listed in Frankfurt, Milan and New York.
Deutsche Telekom has investments of varying sizes in both mobile and fixed line carriers in the US, Italy, Austria, Switzerland, UK, Hungary, the Czech Republic, Poland, Ukraine, Israel, Russia, the Philippines, Malaysia, Indonesia and China. Telecom Italia’s investments are in Austria, Spain, France, Greece, Czech Republic, Ukraine, Serbia, Israel, Argentina, Chile, Bolivia, Brazil, Cuba and India.
This is the first step in creating a European telecom powerhouse, Bernabe said. Until now, nobody has tried to create a European company. Europe has been built on its currency. Nations have given up their sovereignty on monetary policies, their own institutions, borders and customs. This is the first time that a pan-European company is being built – we have no examples to look to. He said that the two companies expect the union to save them 600m euros by next year and 1bn euros by 2003.
Deutche Telekom’s dynamic Sommer, well known and respected in Europe and ready to project himself and his company forcibly on the world market, made it clear the new group would forcibly pursue acquisitions in the Americas and the Far East. If you analyze the financial capacity of the new company, and the debt capacity of the new company, this will excite your fantasies, he said. With our balance sheet, no company in the world is out of our sights, Bernabe added.
Deutsche Telekom already has a bridgehead in North America through its 10% stake in Sprint, and a buy-out offer is a distinct possibility. Another potential deal which has been mooted by analysts in Europe, quoting sources inside Deutsche Telekom, is a takeover of Britain’s Cable & Wireless (which has its own not insubstantial fingers in pies around the globe, not the least of which is the hugely lucrative Hong Kong Telecom which offers a gateway into the world’s fastest growing, and rapidly deregulating, market in China). C&W is also involved in a fierce tussle with NTT to take over a smaller Japanese operator.
