GENEVA-Late in the evening of 21 April, fax machines on the desks of night editors at Europe’s major dailies suddenly began to hum in unison, roused by a simple, one-page press statement. That single page would, within hours, rock the foundations of the telecom industry. Europe’s biggest carrier, Deutsche Telekom, announced it would embark on a dramatic white-knight rescue to merge with besieged Telecom Italia, creating one of the world’s largest telecommunications companies.
At US$91 billion, the European deal dwarfs other industry mega-mergers like AT&T/TCI (US$48 billion) and Bell Atlantic/GTE (US$53 billion). The two companies’ combined market capitalization of around US$173 billion would effectively put the new carrier in the same league as Japanese giant NTT, currently estimated to be valued at about US$176 billion. However, in terms of revenue, Deutsche Telekom/Telecom Italia’s pooled 1998 earnings of US$61 billion put it well ahead of both NTT and AT&T, and combining the two companies’ technical resources would create a network carrying the second-largest volume of traffic in the world after AT&T’s.
The 21 April announcement by Telecom Italia CEO Franco Bernabe and Deutsche Telekom chief Ron Sommer may well signal the end of rival Olivetti’s dreams of a successful hostile takeover of the Italian operator. While Olivetti’s increased EUR11.50 (US$12.20) per share offer still stood at Global Wireless press time, Bernabe’s tireless efforts to find a way of saving his company from the clutches of its Italian rival seem to have paid off, with most analysts now reasonably confident shareholders will support the EUR11.80 (US$12.53) deal with DT at the next full shareholder meeting.
Approvals needed
But Bernabe and Sommer can’t afford to rejoice too soon. Despite the euphoria on both sides, the two executives are well aware that their plans to create the world’s leading telco are still a long way short of being realized.
For a start, the deal needs to secure acceptances from a staggering 90 percent of both companies’ shareholders-no sure thing, especially considering that at EUR11.80 per share, DT’s share-swap offer is only marginally above Olivetti’s share-and-cash deal.
Then there’s the inevitable political wrangling that will be necessary to ensure the blessing of the German and Italian governments-no mean feat, perhaps, given that the Italian government had already begun to make disapproving noises about the German government’s 74-percent stake in DT only one day after the deal was announced.
Finally, the European Commission needs to give the union the green light, which is a process European Union competition commissioner Karel van Miert said will take at least nine months, and which will mean it is a question of when rather than if the Germany government will have to divest its cherished holding in the national carrier.
If the size of the task ahead for the two CEOs seems almost insurmountable, the shared enthusiasm and strong rapport between Bernabe and Sommer was evident at the 22 April press conference held to announce the merger, and may prove the element that finally clinches the deal. Certainly, the charismatic Bernabe has made it clear he’ll be doing everything in his power to convince Telecom Italia shareholders at the next meeting, which must take place by law before June. “If he frames it as simple choice between DT and Olivetti, it could well swing things his way,” said Robert Grindle, European telecom analyst with HSBC Securities in London.
Why the combo works
While the deal took many in the industry by surprise, Yves Gassot, director of IDATE (European Institute for Audiovisual and Telecommunications), said the move fits perfectly with the strategy outlined by DT chief Ron Sommer earlier this year. Tired of watching his company’s market share decline in Germany’s overcrowded, ultra-competitive market, Sommer made it clear at a press conference in February that he believed the carrier’s future lay outside its home turf, adding that DT would be actively seeking partnerships and acquisitions with a view to repositioning itself as a global player.
The Telecom Italia deal should do just that. With 100 million customers worldwide and a combined presence in 24 markets worldwide, the combined new company will be big enough to take on just about any competitor.
Bernabe and Sommer said future plans will be driven by both companies’ considerable strengths in the wireless and the Internet markets, where they’ll represent a formidable force. With a combined cellular subscriber base of just over 33 million they’re about on par with giant Vodafone-AirTouch, and not too far behind world-leader NTT DoCoMo, with its 37 million customers. Add to this Deutsche Telekom’s well-established position as Europe’s largest Internet service provider, and the result is a company that already controls one-fifth of the continent’s entire Internet subscriber base.
Future acquisitions?
If Bernabe and Sommer can bring the deal off, most analysts see some big prizes. The companies already benefit from good geographical synergy between their foreign interests, said Grindle, predicting a rapid move into U.S. and U.K. markets.
“The acquisition of a U.K. operator seems very likely, since it would give the new company a footing in the one big European market it doesn’t yet have,” he said, adding that cellular operators One2One or Orange, or fixed-mobile carrier Cable & Wireless would be obvious targets.
“C&W would be a brilliant buy,” said Grindle. “Both because it’s currently undervalued, and because its presence in markets spanning Europe, the U.S., Asia and the Caribbean would give the combined DT/TI an opportunity to quickly expand a relatively parochial customer base and establish a very solid global network.”
Nevertheless, one early casualty of the deal is almost certain to be Deutsche Telekom’s Global One alliance with France Telecom and Sprint. The French carrier reacted angrily to news of the merger, threatening that DT’s lack of consultation “now gives [France Telecom] greater flexibility to explore new strategic options.”
Despite protests by Ron Sommer that a deal with Telecom Italia does not indicate a lack of commitment to Global One, HSBC’s Grindle said the bad feeling created will probably put paid to any further cooperation between the French and German carriers.
What that means for the two carriers’ 2-percent cross holdings, finalized late last year, isn’t clear. But IDATE specialist Jean-Dominique Seval said the real interest revolves around the position of third partner Sprint. “Sprint and France Telecom could accept the departure of DT and simply look around for a new partner. Or we could see the whole alliance crumble within days,” he said.
In the context of Sprint CEO William Esrey’s recent hard-line criticism of the alliance’s lackluster performance, many are betting Global One will soon be sporting a prominent “For Sale” sign.
