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Friday, April 16, 1999 Published at 19:50 GMT 20:50 UK

Business: The Company File

European telecom tie-up talks

Deutsche Telekom's headquarters in Bonn

Deutsche Telekom and Telecom Italia have refused to comment on reports they are discussing a potential merger that would create a telecommunications giant valued at more than $200bn (£124bn).

[ image: Telecom Italia Managing Director Franco Bernabe is looking for a white knight]
Telecom Italia Managing Director Franco Bernabe is looking for a white knight
Deutsche Telekom would play the role of a white knight, preventing the Italian group from falling into the hands of compatriot Olivetti.

Telecom Italia Managing Director Franco Bernabe is scrambling to ward off a hostile takeover bid by Olivetti after his defence plan went up in smoke last weekend when shareholders failed to give him their backing.

But analysts said any deal between the two would not be guaranteed a smooth passage.

Regulatory hurdles

"The hurdles are very high. The governments would have to agree, the Brussels and German regulators would have to agree," said WestLB Panmure analyst Holger Grawe.

"There is a political dimension - the national identity of the Italians is involved."

European Union sources said the EU "would look very closely" at any deal between Deutsche and Telecom Italia.

The Financial Times reported that talks between the two companies' chief executives had been going on for some time, but had been brought to a head by Olivetti's hostile $65bn bid for Telecom Italia in February.

But a Telecom Italia spokesman would only say the company had "no comment for now".

A Deutsche Telekom spokesman also declined to comment, preferring to stress the success of its existing Italian joint venture with France Telecom and Enel.

He said: "There is a lot of speculation right now that we are not going to participate in."

Deutsche Telekom shares closed up five cents at 38.15 euros after falling nearly 8% on Thursday on news of a capital increase.

Telecom Italia finished 3% higher at 9.88 euros.

C&W alternative

Germany's VWD news agency reported meanwhile that unnamed Telekom employees had confirmed the talks, but had said that the outcome was still open.

The head of Deutsche Telekom, Ron Sommer, has repeatedly said that everyone was talking to everybody in the telecommunications industry.

Some analysts, for example, suggest that Cable & Wireless would be a much better partner for Telekom.

French alliance in question

A merger could save Telecom Italia but would put Deutsche Telekom's long-standing alliance with France Telecom into question. France Telecom also declined comment.

However the Deutsche Telekom spokesman said the company had kept its French partner up to date with its actions.

"In everything we do, we remain in close contact. Each knows what the other is doing," he said.

Olivetti swooped on Telecom Italia in February with a 10 euros per share cash, share and bond offer, later increased to 11.5 euros per share.

If completed, either the Olivetti or the Deutsche Telekom deals would constitute Europe's largest-ever takeover.

The German government, meanwhile has said it plans to begin reducing its entire direct and indirect stake in Deutsche Telekom towards zero from 2000 onwards.

German finance ministry deputy director of privatisation Juergen Siewert said the first of a series of tranches would be offered sometime next year.

Change of culture

Since the birth of the single currency, the pace of merger and takeover activity in the euro-zone has increased dramatically.

Hostile bids, which were once highly unusual in the European context, have occurred in banking, luxury goods and retailing as well as telecoms.

Dominic Baker, European fund manager at Framlington Investment Management in London said: "What we have seen in the last couple of months in Europe is a fundamental change of culture - with hostile bids and now this. It is a case of thinking the unthinkable."

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