LONDON (CNNfn) - Telecom Italia is discussing a deal with Germany's Deutsche Telekom that would be the largest merger ever, according to a published report Friday. An agreement would be the Italian operator's latest defense against a hostile takeover by Olivetti.
The groups have been in discussions for months, according to the Financial Times. Neither company would comment and telecom analysts were skeptical about the report.
"The Italian administration would rather have (Telecom Italia) remain in Italian hands," Eric Melloul, securities analyst at Argus Research, told CNNfn's "Business Day."
Still, Melloul said, in an age of global telecomunications, companies likely will be linking across borders and continents to stay competitive.
"Every single company that wants to survive will have to have a presence in the United States, in Europe and in Asia," Melloul said. "It's a musical chairs game. If you don't buy a company right now, you may be left without a partner down the road."
The Italian firm's stand against Olivetti's $65 billion bid slipped last weekend when shareholders failed to approve a defense plan. Telecom Italia was reported to be seeking a white knight, or a means of recapitalizing the company through a shell company to escape Olivetti's advances.
Deutsche announced plans Thursday to raise up to $12.5 billion in additional capital.
Analysts believe Deutsche would have to top Olivetti's bid, even if the deal were structured as a merger. This would make any transaction earnings dilutive for the German company at a time when its own share price is under pressure.
Deutsche Telekom already has a wide-ranging alliance with France Telecom that the report said would have to be dropped. It likely would be forced by regulatory authorities to unwind a number of other businesses to complete a deal with the Italian company. The German company recently bid successfully for Italy's third cellular license.
Deutsche has a market capitalization of $117 billion, while Telecom Italia has a market value of roughly $77 billion.
Deutsche Telekom rose fractionally in early trading in Frankfurt Friday, gaining less than 1 percent to 39 euros while France Telecom shares dipped 1.8 percent to 76.60 euros. Telecom Italia stock rose 1.5 percent in Milan Friday.
Friday's merger report comes after MCI last year joined forces with WorldCom in a $37 billion merger.
A Telecom Italia-Deutsche Telekom link would create a merged company worth $216 billion, surpassing the current record deal announced by Exxon (XON) and Mobil (MOB).