Italy-the location of some of Shakespeare’s finest plays-last week became the setting for the largest
telecom drama to occur in European history.
The players:
Olivetti Spa-A smaller operator that just two years
ago was on the verge of bankruptcy. It enters the scene today as an aggressor, extending a $58 billion hostile takeover
bid for a company five times its size-Telecom Italia Spa-in what would be the Old World’s largest telecom deal
ever.
Telecom Italia-The former state-run telecom monopoly, sixth-largest phone company in the world and parent
company of Europe’s largest and richest mobile phone operator, Telecom Italia Mobile Spa. It is preparing a rigorous
defense of its holdings, resisting the unwanted advances by Olivetti in court and preparing some internal moves that
could block the effort.
Mannesmann AG-A German telecom operator and Olivetti’s joint-venture partner in a
holding company that owns Europe’s second-largest cellular operator, Omnitel Pronto Italia Spa, and start-up fixed line
operator Infostrada. Should Olivetti’s bid succeed, Mannesmann could buy its partner’s stake in that holding company
and thereby gain control of 55 percent of Omnitel and 100 percent of Infostrada.
To be or not to be
The scene
unfolded last week when Olivetti made a surprise filing with Consob, Italy’s stock market regulatory agency, unveiling
the details of a David-and-Goliath proposal to take over Telecom Italia. However, Consob ruled the filing did not
constitute a legal takeover bid because it did not list a date for the tender offer to proceed and depended too heavily on
other transactions to fund it.
After much negotiation with Consob, Olivetti then refiled its bid, this time setting an
April date for the tender offer but leaving the financial structure intact.
According to the bid, Olivetti plans to
initiate a tender offer for all 5.25 billion shares of Telecom Italia stock for about $11 a share, 60 percent to be paid in
cash and the rest in bonds and shares of Tecnost stock-an Olivetti subsidiary that makes electronic lottery ticket
distributors through which it would effectuate the takeover.
Analysts figure Olivetti has about $9 billion in cash
available for the takeover. To finance the rest of the transaction’s cash portion, Olivetti said it would sell its stake in
Omnitel and Infostrada to Mannesmann AG (its joint-venture partner in both companies) gaining an additional $10
billion. Another $15.5 billion would come from a bond offering, and the remaining estimated $23 billion from its
banks-Donaldson Lufkin & Jenrette, Lehman Brothers, Chase Manhattan Bank and Italy’s Mediobanca.
Should the
takeover succeed, Olivetti might merge Tecnost with Telecom Italia or even merge itself with the larger telco. Olivetti
stated its intention to retain all of TIM, but could sell off parts of it to repay the takeover debt.
For its part, the
Telecom Italia board rejected both offers, calling the bid “full of holes,” and asked Consob again to reject
it.
Consob is expected to rule on the new filing in about a week. If approved, Telecom Italia will have to let its
shareholders decide whether to accept the offer. Last year, Italy passed new legislation governing the process of
corporate takeovers that forbids targeted companies from taking action to scuttle an attempted takeover once a legal bid
is made, such as altering its capital or share structures.
However, should Consob invalidate the second filing,
Telecom Italia would be free to take defensive steps.
Much ado about nothing?
Considered central to Telecom
Italia’s defense strategy is TIM, of which it owns 60 percent. According to Italian news agencies, the Telecom Italia
board has given company Chairman and CEO Franco Bernabe permission to pursue a possible combination of parent
company and subsidiary. A combined Telecom Italia and TIM would be worth more than Telecom Italia alone and
beyond Olivetti’s means to take over.
The mere existence of TIM alone could ruin Olivetti’s plan. Under the new
takeover law, any firm attempting to take over a company with a controlling interest in another company must make a
separate bid for that other company. Should Consob rule that stipulation applies here, Olivetti would have to make a
separate multibillion dollar bid for TIM.
Any such ruling effectively would end the takeover attempt, given the
weak financial structure of the current bid. Although the $11 per-share proposal is 10 percent more than Telecom
Italia’s stock value the day Olivetti originally filed, analysts have said it’s too low. Published news reports have quoted
some analysts setting a price upward of $13.25 to $15.50 per share.
Consob also launched an investigation into
possible wrongdoing prior to the takeover filing, focusing on Olivetti’s January denial of any plans to buy Telecom
Italia.
What a tangled web we weave
The complications continue. Italy’s Treasury Ministry must give consent
before Olivetti can hand over full control of Omnitel’s cellular licenses to Mannesmann, and while Mannesmann and
Olivetti have agreed on the financial transaction, the government may balk at approving it.
Olivetti was granted the
license to operate Omnitel with the understanding it would not sell the company for five years. Olivetti only has owned
it for four. Omnitel holds about 30 percent of Italy’s cellular market share, and Italy traditionally has hesitated to pass
control of Italian institutions to foreign entities.
Still another potential hurdle is Italy’s always-volatile political
landscape. Telecom Italia was once a state-run monopoly. Today, the government holds 3.4 percent of Telecom Italia
common stock as well as what’s called the “golden share” of the company and has veto powers that allow it
to block any investor acquisition that results in more than a 3-percent ownership of the company.
While it is too
early to tell, initial salvos among Italian politicians portend the government may be at odds internally over the matter.
Prime Minister Massimo D’Alema has made encouraging noises about the attempt, while urging the government to
remain neutral. The Treasury Ministry has been cooler in its reception. Neither, however, want to see Telecom Italia
fall into the hands of a foreign operator.
What fools these mortals be
This is an important concern because
Telecom Italia is ripe for plundering. The company’s shareholder structure was left fragmented by what has been called
a sloppy privatization effort, undertaken in October 1997. The result is a company whose board holds only 7 percent of
its total stock, with no shareholder owning more than 3 percent of the company.
Since the privatization, Telecom
Italia has been lacking direction and strategic focus, leading to well-publicized squabbling among upper management
that resulted in three executive-level shakeups in the last year-and-a-half. The most recent was the departure of the
controversial Mario Rossignolo, former chairman and chief executive officer, whose tenure was marked by several
boardroom battles and failed ventures.
He was replaced by the well-respected Bernabe, who has driven Telecom
Italia’s stock up 40 percent in the three months he has been on board. Some say the bid for Telecom Italia came too
late-the company’s stock was much more vulnerable six months ago when Rossignolo resigned.
Bernabe is expected
to reveal his strategic vision for the company in the next week. Shareholders then have two choices-reject the Olivetti
bid in favor of Bernabe’s changes, or side with Olivetti. By all accounts, there are several acts left to play out before the
curtain falls on this particular theater.
