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Telecoms set $82B merger
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April 22, 1999: 2:04 p.m. ET
German, Italian giants agree to deal; Olivetti bid looms; French firm protests
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LONDON (CNNfn) - Deutsche Telekom and Telecom Italia formally outlined their $82.5 billion merger plan Thursday, but regulatory obstacles and the threat of a rival offer still pose a serious threat to hopes of closing a deal by the end of the year.
Telecom Italia chief executive Franco Bernabe and Deutsche chief Ron Summer sought to highlight synergies from the deal and appease regulators at a packed press conference in London.
"When regulators realize the opportunities (we create), they will support the business and we will go ahead," said Bernabe.
The pair, who would become co-chairmen and chief executives of a merged entity, also said the new group would focus on expansion in the United States and on building up their wireless, Internet and value-added businesses.
Joint CEOs: Franco Bernabe & Ron Sommer
"We know exactly where our holes are [and] the U.S. is an important issue," said Sommer. "Limiting this company to an Italian-German combination would create a weak competitor," said Sommer.
The German company's chairman refused to be drawn out on the possibility of a deal with U.S. long-distance operator Sprint (PCS) , with whom Deutsche is a partner in the Global One alliance which includes France Telecom.
Deutsche and TI already have a patchwork of alliances in place and the negative impact on the German firm's wide-ranging deal with France Telecom has been the focus of attention.
Sommer said he discussed the deal with France Telecom and said it had the potential to strengthen Global One. "We're not merging these companies against France Telecom," he said.
French Telecom 'deplores' deal
But the French company minced no words in expressing distaste for the German-Italian deal.
"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 said in a statement issued in Paris.
"France Telecom deplores this behavior and will undertake whatever action is appropriate to protect its rights and the interests of its shareholders," the company added.
The German-Italian link is the first merger between Europe's former state-owned telecom monopolies and would create the world's largest telecom company in terms of market capitalization and second only in sales to Japan's NTT.
The merger partners said they expect to achieve cost savings from revenue growth and operating costs totaling 600 million euros ($835 million) in 2000. Restructuring charges in the wake of the deal would be less than this.
The savings would increase to more than 1 billion euros by 2003, said TI's Bernabe, who declined to identify potential job losses among the companies 300,000 workforce.
Capital expenditure savings would total at least 300 million euros by the end of 2001, the companies said.
The companies hope to complete the deal by the fourth quarter of the year. But despite last-minute assurances from the German and Italian governments, the plan faces formidable regulatory obstacles -- which have led many market analysts to give it little chance of success.
The companies were unable to give a firm time scale for presenting the full plan to shareholders and the specter of a firm bid from Olivetti still hangs over the deal.
Dialing for dollars
Olivetti's $65 billion hostile bid for Italia received approval from the European Commission in Brussels Thursday.
Bernabe declined to speculate on an Olivetti offer pending a firm bid, but a senior Deutsche Telekom official who refused to be named said the two companies were "flexible" on the terms of their deal. "We know Olivetti will not go away," he said.
Olivetti's formal offer for 100 percent of Telecom Italia's voting shares is expected to be launched Friday, according to one of the company's financial advisers, who declined to be identified.
The Deutsche-TI deal involves the creation of a new German-registered company with twin operational headquarters in Bonn and Rome. The company, which will follow U.S. GAAP accounting rules, will be listed in Frankfurt, Milan and New York.
The plan involves the exchange of one Deutsche share for one share in the new company. TI's ordinary shareholders will receive one new company shares for each three TI shares they hold.
The ratios equate to 12.03 euros per ordinary TI share compared with Olivetti's offer of 11.5 euros.
Bernabe said this represented a premium of 21.3 percent to TI's closing share price on April 21.
Joint management
The combination of Bernabe and Sommer in the top job is intended to drive home the point that the marriage is a "merger of equals," as Telecom Italia insisted it must be.
"We know exactly how we will work together. When Ron is skiing, I will do some work and vice versa," joked Bernabe.
Deutsche is the larger of the two companies and will control 56 percent of the new entity, versus 44 percent for Telecom Italia; the parity will be reflected in equal representation on the new group's 20-member supervisory board.
Each company will appoint five representatives with workers and unions appointing the other 10.
The pact -- struck after three days of intense negotiations between the companies' often clashing boards -- marks a watershed in cross-border European mergers.
The new entity will have a market capitalization of nearly $200 billion and enough communications clout to force a wholesale rethinking of the European telecom industry.
Sommer said the new company -- which has yet to be named -- will concentrate on wireless, Internet and value-added services. A key component will be the integration of Deutsche's T-Mobile arm and TIM, the Italian cellular. Telecom Italia plans to press ahead with its plan to regain control.
Both companies are part of a patchwork of strategic alliances with other national phone companies that could unravel after a deal is complete.
Prominent among the alliances is the joint venture of France Telecom, Deutsche Telekom and Sprint in the global services company Global One.
"Global One's activity is distinct from that of its shareholders and the company will continue to provide service to its customers normally," France Telecom said in its statement.
Numerous obstacles ahead
But the obstacles are as formidable as the companies' optimism: analysts cite the daunting logistics behind stitching together two companies with radically differing cultures and management styles.
The would-be partners must now also garner approval from Telecom Italia shareholders and U.S. and European regulators.
Separately, the EU's competition commissioner, Karel van Miert, told CNN Thursday his agency had given a green light to Olivetti's $65 billion hostile bid for Telecom Italia.
Telecom Italia's board gave its own nod to the pact only after Germany's government agreed to the principle of parity and to reduce or dispose of its 74 percent stake in Deutsche Telekom in line with the government's privatization policy "as soon as feasible, subject to market conditions."
In a letter sent Wednesday to the Italian Treasury, the German Ministry of Finance also acquiesced to TI's demand that it not interfere with the business strategy or governance of the new entity.
The need for the assurances underscored Telecom Italia's concerns that it could be vulnerable to nationalization by the German government in the absence of guarantees to the contrary. In effect, the Italians were fearful that a merger agreement could amount to a takeover by the German government which, by one reported estimate, would own 40 percent of the combined company after the merger.
Under terms of the agreed merger, a three-for-one stock swap would effectively transfer control of 56 percent of the new company to Deutsche Telekom's shareholders. The Italians would control the remainder.
Olivetti thwarted?
Aside from creating a telecom juggernaut, a merger would quash Olivetti's $65 billion hostile bid for Telecom Italia. Italia is nearly five times the size of Olivetti.
In recent weeks, TI's wall of defense against the unwanted offer has cracked. The former monopoly failed to achieve a quorum of shareholders at a meeting intended to approve a defense strategy against Olivetti.
Olivetti has indicated it will press ahead with its offer.
Meanwhile, under the terms of the Deutsche deal, the share ratio will be improved in the event 90 percent of Telecom Italia shareholders approve the pact. Then, the exchange ratio will be amended to one share of the new company for 2.9412 ordinary shares of Telecom Italia or 5.5 savings shares. The amended terms would raise the effective bid value for Telecom to $83 billion based on current prices.
If 90 percent of Deutsche Telekom shareholders consent to the deal, they will only have to give up 0.9901 of an existing share to receive one newly issued share.
--from staff and wire reports
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