Italia Telecom and Deutsche Telekom: A Pipe Dream?

After months of discussions and negotiations, the long awaited $81 billion
merger between Telecom Italia
and Deutsche Telekom seems to be far from
finalized.

While the German telecommunications giant quickly developed a plan to move
forward in this joint venture, Italy is finding the transition from
state-owned monopoly to privatization extremely painful. As one political
leader put it, “The government wants Telecom to establish itself as a
public company, while maintaining its control over the industry.”

The latest episode of this soap opera-like battle between Telecom
administrators, shareholders, and political leaders to form or not to form
a majority vote to merge with Deutsche Telekom saw the intervention of
government leader Massimo D’Alema, who met with FIAT tycoon Gianni Agnelli,
a principle shareholder of Telecom Italia.

With little interest in allowing the Germans to control a majority stake in
Italian telecommunications, D’Alema, according to news reports, proposed a
merger between Telecom Italia and Olivetti, which would insure control of
the company remains in Italy.

Some reports, in fact, say that the Italian government could utilize their
“golden share” option to block the German union, if necessary.

“Our main concern,” expressed a spokesperson for the state, “is that the
German government owns 72 percent of Deutsche Telekom and, despite reports
that they will privatize the company, has not moved forward in this
direction. Now we are to simply hand over Telecom Italia?”

Ironically the concept of a Telecom Italia and Deutsche Telekom merger came
about during a hostile take-over bid by the Olivetti group, after Consob,
the Italian stock market regulatory board, approved a $65 billion purchase
of Telecom Italia shares by Olivetti Spa.

“We’ve been working on (the Deutsche Telekom deal) for three months,”
Franco Bernable, manager of Telecom Italia, told reporters. “We are not
talking about a competing offer to Olivetti. We’ve indicated Olivetti’s
offer is unacceptable, but we think our shareholders need a long term
perspective.”

Telecom Italia currently controls 100 percent of Italy’s local telephone
business, while sharing long distance service with Infostrada, currently
owned by Olivetti, Wind, and a handful of minor carriers. Under the former
monopoly’s umbrella of services are also Telecom Italia Mobile (TIM), the
national mobile phone network, Telecom Italia Network (TIN) Internet
service, and the recently added cable television operation, Stream.

Olivetti, through its subsidiary, Infostrada, offers long-distance voice
service to over 1.75 million customers in Italy. In addition, they provide
Internet access to nearly 200,000. This latter figure accounts for a 57
percent increase in users over the past year.

The Telecom/Telekom union, according to Managing Director of Deutsche
Telekom, Ron Sommers, would bring in combined gross earnings of $1.29
billion by 2002 and $1.72 billion by 2003.

Additional revenues from Internet related business, through the floatation
of Telekom’s T-Online service, would amount to more than $763 million by
2002, according to Sommers.

At the same time Olivetti was moving to “buy out” Telecom Italia, other
global telecommunications players, including British Telecom and Bell
Atlantic, had indicated interest in joint ventures. Then, almost overnight,
it was announced that Telecom Italia and Deutsche Telekom were drafting a
merger agreement.

After months of negotiations, however, there still exist several hurdles to
overcome before a joint venture can be finalized. Internal conflicts seem
to be running high between Telecom Italia shareholders and government leaders.

During their encounter in Rome, Gianni Agnelli, who owns a 0.6 percent
share of Telecom Italia, reportedly refused PrimeMinister Massimo
D’Alema’s proposal that would unit Telecom and Olivetti.

“If the Olivetti bid comes off, we will hand over our shares or sell them,”
Agnelli told reporters.
The Italian and German governments have slated a series of talks May 17 and
18, at which time D’Alema and Chancellor Gerhard Schroeder will face the
Telecom/Telekom issue.

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