Telecom Italia, Deutsche Telekom
Confirm They're in Merger Talks
By GAUTAM NAIK, WILLIAM BOSTON and BRANDON MITCHENER
Staff Reporters of THE WALL STREET JOURNAL
Deutsche Telekom AG and Telecom Italia SpA confirmed that they were
exploring a merger that would create one of the world's largest phone
companies.
Under terms of the deal being contemplated, the German and Italian
carriers would merge in a share swap that values all of Telecom Italia at
roughly 100 billion euros ($107 billion), or at least 12.60 euros a share --
a 28% premium over its closing price of 9.88 euros on Friday, said people
familiar with the carriers' plans. Shareholders of the two carriers would
exchange their shares for stock in a new German-based company.
Ultimately, Deutsche Telekom shareholders would own 60% of the new
company, while Telecom Italia shareholders would own 40%, these
people said.
The chairmen of the two companies would jointly head the merged entity
for an initial five years, these people added. The operating units such as
mobile phones or data would be run by an individual chosen from one of
the two companies. Deutsche Telekom and Telecom Italia would have
equal representation on the board of the new company. If the transaction is
completed, the German government would own roughly 40% of the
merged entity.
Dwarfing AT&T
A merger would create the world's largest local-phone provider and one
of the biggest wireless players. It would have a market capitalization of
about $200 billion, more than 240,000 employees and significant
operations in Europe and Latin America -- but not the U.S. With 61 billion
euros in annual revenue, the combined company would dwarf AT&T
Corp., which has some 51 billion euros in revenue.
Even if the deal fails, the mere attempt to push it through will have
far-reaching effects. The German-Italian plan shatters the taboo that
combinations between former phone monopolies are politically unfeasible.
There is a good chance, if the merger is completed, that it would knock
out Olivetti SpA's hostile bid of 11.5 euros a share for Telecom Italia --
and possibly make Olivetti a takeover target itself. And it will almost
certainly trigger a round of other splashy telecom mergers as other
European carriers take defensive measures.
So far, any deals between two former state monopolies in Europe have
been considered unlikely. Other big deals have typically involved U.S.
players. British Telecommunications PLC and AT&T are pooling their
international assets and creating an $11 billion global venture, while
Britain's Vodafone Group PLC is buying AirTouch Communications Inc.
of the U.S. to create a wireless-phone titan. The only other big
Europe-only transaction is the planned merger between the carriers of
Sweden and Norway, but those carriers are state-owned.
With the German-Italian plan, "the floodgates are open and the water is
pouring through," says Jim Cantwell, a banker at Donaldson, Lufkin &
Jenrette Inc., which helped Olivetti target Telecom Italia -- the very event
now forcing Telecom Italia and Deutsche Telekom into each others' arms.
The idea for the German-Italian alliance was hatched a mere 10 days after
Olivetti launched its hostile bid for Telecom Italia. Franco Bernabe, the
Italian carrier's chief executive officer, flew to Bonn and secretly met with
Deutsche Telekom Chairman Ron Sommer. The two discussed a possible
merger over several similar meetings in later weeks. Deutsche Telekom
brought in Goldman, Sachs & Co. to advise it on how such a deal might
be set up. And last week, Telecom Italia's bankers at Credit Suisse
Group's Credit Suisse First Boston and J.P. Morgan & Co. were informed
about the planned merger.
"The two CEOs were completely behind this blockbuster deal," says one
person familiar with the situation. "Like DaimlerChrysler, this one breaks
the mold."
Hurdles Are Huge
Deutsche Telekom and Telecom Italia's boards meet separately Monday,
and a preliminary agreement could be announced by Tuesday, according
to people close to the companies.
The regulatory and political hurdles facing Deutsche Telekom and Telecom
Italia are almost as huge as the audacity of the planned transaction. The
German government, which owns 72% of Deutsche Telekom, would be in
the tricky position of owning a good chunk of Italy's main communications
asset. And the European Commission could also block the merger on
anticompetitive grounds.
The German-Italian plan presents a new challenge for European regulators.
Having pried open Europe's phone market to full competition in January
1998, the commission must now deal with the consequences. It must
decide whether the German-Italian plan is good for customers or merely a
quest for corporate clout. (The U.S. example is a cautionary one: Full
deregulation in 1996 has led to a string of Bell company mergers, but no
widespread competition in local-phone services.)
At the very least, Deutsche Telekom and Telecom Italia could be forced to
dispose of overlapping assets to satisfy antitrust concerns. These include
the companies' separate interests in ventures in Austria and France.
The highest hurdle could be the German government's 72% ownership in
Deutsche Telekom. Beginning next year, the German government expects
to further reduce its interest in Deutsche Telekom. The Italian government
has sought assurances that this will happen quickly, people familiar with the
situation said.
The German and Italian governments appear to support the deal. German
Chancellor Gerhard Schroeder and Italian Prime Minister Massimo
D'Alema discussed the issue in a phone call on Friday. And Sunday,
German Finance Minister Hans Eichel and Italian Treasury Minister Carlo
Azeglio Ciampi took time off from a meeting of European finance ministers
in Dresden to discuss the merger plans. "We have an underlying liking for
the idea that the two companies could get together," Mr. Eichel said.
If the deal is completed -- and that could take months to happen -- it will
spur various knock-on effects. It could poison a longstanding partnership
between Deutsche Telekom and France Telecom SA. The
French-German team own small stakes in each other, as well as a joint
20% stake in Sprint Corp. of the U.S. The three companies together run
Global One, a venture that serves multinational corporations. Global One
has performed poorly for years, and Bonn's sudden rapprochement with
the Italians might kill the venture. People familiar with the situation say
France Telecom wasn't even aware of a deal being discussed between its
partner and the Italians.
Mr. Sommer of Deutsche Telekom may have greater ambitions in mind.
Although his company is bowed down with debt, Telecom Italia has a
relatively light balance sheet and generates vast sums of cash. Once a
merger is completed, the combined entity could pursue a major acquisition
in the U.S., the world's biggest phone market. Deutsche Telekom also has
separate plans for a capital increase of as much as 11 billion euros ($6
billion) sometime in June. The German-Italian team "has a huge hole in the
States. They may go after Sprint," one banker speculates. |
