Government objections

BBC Business' Patrick Bartlett: Deal isn't guaranteed yet

The Italian government is pointedly refusing to support the proposed merger, unless the Germany government gives a precise timetable for reducing its 74% stake in Deutsche Telekom, according to a report in the Financial Times newspaper.

The Italian government is highly sensitive to the charge that it is allowing its recently privatised telephone company to fall under foreign control.

The German government owns 74% of Deutsche Telekom

The German government says it wants to proceed at its own pace, but has promised not to seek to influence the business strategy of the new company.

The board of Telecom Italia has said it is satisfied with these assurances.

French 'regrets'

France Telekom, until now a strategic partner of Deutsche Telekom, is livid because of the deal: "The takeover of Telecom Italia, which is being carried out without the slightest prior consultation with France Telecom, is a clear violation of accords."

The company said it "regrets this behaviour" and would take all steps necessary to defend its rights and interests, as well as those of its shareholders.

Olivetti proceeds

Italian telecoms company Olivetti, meanwhile, has been cleared by the Italian regulator to go ahead with its rival bid for Telecom Italia.

Telecom Italia boss Franco Bernabe hopes that Deutsche Telecom will save him from Olivetti

The company's plan for a hostile takeover of its much larger competitor had triggered the Italo-German merger plans

Olivetti has offered to pay 11.5 euros per share of Telecom Italia.

The deal with Deutsche Telekom values the former Italian state monopoly at 12.03 euros - a 21% premium on TI's earlier share price.

Telecom Italia share holders, though, will think twice before accepting either offer.

Little Olivetti will have to take up a huge amount of debt to finance its bid, saddling the new company with a heavy burden.

Deutsche Telekom, on the other hand, has proposed a stock swap. Its own shares, though, have fallen sharply on new of the deal. If this price slide continues, Deutsche's offer would come very close to the money offered by Olivetti.

EU worries

Another potential problem are objections from European regulators. Karel van Miert, acting EU competition commissioner, said that "it's obvious there are some problems".

Michael Schatzschneider at BHF bank predicted a "year of uncertainty for investors" as the official review would take a long time.

Expansion plans

On Thursday, the chief executives of Deutsche Telekom and Telecom Italia had announced the details of their merger plan, which would create the world's second largest telephone company with a value of $172bn.

Only Japan's NTT is bigger.

They said the new phone giant would pursue a global expansion strategy, with further acquisitions likely.

It is likely to target the mobile phone sector and expansion in the UK, the Far East and the Americas.

Telecom Italia chief executive Franco Bernabe said that the combined company would not be either a 'dinosaur or a Eurosaur' but a flexible and technologically advanced pan-European powerhouse.

Ron Sommer, the Deutsche Telekom chief executive, told a joint press conference that mobile phones, Internet services, and high-speed ISDN and ADSL links would drive future company growth.

Takeover speculation immediately centered on the US long-distance operator Sprint, which is already part of a global alliance with Deutsche Telekom, and the UK's Cable and Wireless, with its extensive Internet interests and Far Eastern presence.

Merger of equals

Under the terms of the deal, Deutsche Telekom shareholders, including the German government, will hold 56% of the combined company, with Telecom Italia shareholders owning 44%.

But the company is taking extraordinary steps to allay Italian concerns of a German takeover.

The two chief executives said they planned to share the role of boss of the new company, switching positions each year, with a board made up of equal numbers from Italy and Germany. The new company - which is currently un-named - will have two headquarters, in Bonn and Rome, and will use English as a working language.

The two companies said they hoped to complete the merger by the end of 1999, with cost savings of up to $1bn a year.

Mr Bernabe said that although further job cuts could not be ruled out, he hoped that the overall impact on employment would be positive.

Historic corporate link-up

The proposed merger will rank among the largest corporate deals ever.

It would dramatically alter the corporate landscape of Europe and revolutionise the telecommunications industry.

The new entity would be the world's largest operator in terms of market capitalisation and number of fixed lines and the second based on international traffic volumes and domestic mobile phone subscribers.

It would have 300,000 employees and sales of $71bn.

The company has operations in 22 countries and 109m customers.