Static greets AT&T push for Italian telecom (Eric Reguly)
Globe and Mail 13/04/07
ROME — If you think the phone industry is hot in Canada, you should see what’s happening on the other side of the Atlantic. The European telecom sector seems on the verge of upheaval and the themes are similar. Investors want deals after years of shabby performance. Foreign companies want in and the nationalists are pleading for local solutions.
Nowhere is this better illustrated than the battle for Telecom Italia SpA. The resurgent AT&T Inc. and its Mexican partner, wireless operator America Movil SA de CV, said on April 1 that they are in talks to buy a majority stake in Olimpia SpA, which controls Telecom Italia. Olimpia is 80-per-cent owned by Pirelli SpA, the famous Italian tire maker that wants out of Telecom Italia. News of the proposal managed to bump reports of soccer turmoil from the front pages of the Italian dailies this week.
Legally speaking, there are no barriers to foreign control of Telecom Italia, which was privatized in 1997 and has no lingering government ownership. But that hasn’t stopped Italian politicians from working themselves into a jingoistic frenzy. “I think the Italian government will try to mediate,” said Stefano Nicoletti, an analyst at Ovum, a London telecom consulting firm. “There is political resistance to foreign ownership.”
Evidently encouraged by the Italian government, two Italian banks — Intesa Sanpaolo and Mediobanca SpA — this week announced they too were in talks to buy a majority stake in Olimpia from Pirelli. This would please Prime Minister Romano Prodi, who is pushing for an Italian counteroffer.
In spite of the pleadings to keep Telecom Italia in domestic hands, Italy’s stance on foreign investment is in fact more liberal than many other countries in Europe. Selling control of France Télécom SA or Deutsche Telecom to outsiders is all but unthinkable and, practically speaking, impossible. Each company is roughly one-third government owned. In Canada, foreigners are allowed to take only a minority stake in telecom companies. The American private equity firms circling Telus Corp. and BCE Inc., owner of Bell Canada, would have to “Canadianize” their bids by recruiting domestic partners, such as the pension funds, to gain takeover approval.
For its part, AT&T is wary of describing the effort to invest in Olimpia as a control bid. It wants to buy only one-third of Olympia, for about €1.3-billion ($2-billion), giving it an indirect 6-per-cent stake in Telecom Italia (America Movil, led by billionaire Carlos Slim, would pay the same for an identical stake). “This is not about control. This is about co-operation with Telecom Italia,” said AT&T spokesman Niall Hickey.
Telecom Italia is crucial to AT&T’s European foray. The American company is negotiating partnerships around the world, concentrating on the business market, and is happy with minority stakes. Bernt Ostergaard, an analyst with research firm Current Analysis, says AT&T could “suddenly go native,” that is, become a domestic European competitor, with Telecom Italia, Europe’s fifth-biggest telecom company.
AT&T would also gain a foothold in the European mobile services, through TIM — Telecom Italia Mobile — and TIM’s alliances with other European wireless companies. It would gain a broadband network presence in Germany, France and the Netherlands. AT&T is building a presence in Canada, too, but regulations prevent it from owning infrastructure. It is lobbying to have this restriction eliminated.
There is no assurance that AT&T will get the Telecom Italia prize, especially with the Italian government pushing for a rival Italian bid. But the European telecom sector is in flux and other opportunities are sure to arise as investors and deal makers take new interest in a sector that has shed massive amounts of value.
Since the European markets began rallying in March, 2003, phone stocks are the second-worst performers and now trade at less than a third of their peak level in 2000, according to Bloomberg. European phone shares trade at 13.8 times this year’s expected earnings, about half their average price-earnings ratio over the previous 10 years, says FactSet Research Systems in London.
Investors apparently think the sector has reached bottom. They are also attracted to the telecom companies’ strong cash flows and high dividend yields — the European average is 4.6 per cent. Fat takeover premiums seem likely as consolidation becomes a theme, as it did in the United States and Canada. Inevitable restructurings may surface value.
Takeovers have already started. Recently, Swisscom Ltd. bid €3.7-billion for FastWeb SpA, an Italian broadband company with a million broadband and Internet customers. Analysts say the European mobile phone industry, with too many struggling players, is ripe for consolidation. If a shift of control at Telecom Italia succeeds in raising values, copycat deals are sure to follow.