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Monday, April 26, 1999 Published at 12:51 GMT 13:51 UK


Business: The Company File

Top talks on telecoms merger

If the deal works, it will be one of the world's top phone companies

The controversial merger of Deutsche Telekom and Telecom Italia may still fall apart before it is finally cemented because of the considerable difficulties it faces.


BBC Business' Patrick Bartlett: Deal isn't guaranteed yet
For a variety of reasons, the Italian government, France Telecom and Olivetti are all opposed to the coming together of the two former state monopolies .

And the European Union competition watchdog may also refuse to rubber stamp a deal.

Now, the German finance minister Hans Eichel is to meet his Italian counterpart Carlo Azeglio Ciampi early next week to try to clear the way for the $181 billion merger.


[ image: The German government owns 74% of Deutsche Telekom]
The German government owns 74% of Deutsche Telekom
"We expect the existing problems will be resolved and the way will be cleared for a successful merger of the companies," a German finance ministry spokesman said.

Government objections

The Italian government has been refusing to support the proposed merger, unless the German 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.

French 'regrets'

France Telecom, until now a strategic partner of Deutsche Telekom, is also upset.

It said: "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 interests.

Olivetti proceeds

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


[ image: Telecom Italia boss  Franco Bernabe hopes that Deutsche Telecom will save him from Olivetti]
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 Italian-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.

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 news 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".

On Thursday, the chief executives of Deutsche Telekom and Telecom Italia announced 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.

Ron Sommer, the Deutsche Telekom chief executive, commented 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.

Historic corporate link-up

The proposed merger will rank among the largest corporate deals ever and would dramatically alter the business landscape of Europe.

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.





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The Company File Contents


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