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Deutsche Telekom ducking competition via Italy deal

Cash being used for overseas revenue, rather than head-on battle in German market

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Privatised Italian phone monopoly Telecom Italia would rather climb into bed with white-knight Deutsche Telekom than risk a hostile takeover by Olivetti, it appears. Olivetti's $65 billion bid remains on the table as DT and TI attempt to tie the knot. DT is a most reluctant privatiser - the German government still has 72 per cent, and the German company is seriously challenged on its home turf by more than 50 competitors. It has already lost around a third of its long-distance market to companies like Mannesmann. Rather than confront the realities of the commercial world and compete, DT is looking to using its cash to gain revenue in overseas markets in what it sees as an opportunity move, rather than a love match. Meanwhile France Telecom is feeling huffy that its own Global One affair with DT, which included 2 per cent cross-ownership, has been ignored by its neighbour. The Global One collaboration (with Sprint as well) to provide services for conglomerates has so far been a financial failure. But it hasn't escaped DT that Telecom Italia has a balance sheet just waiting for some creative accounting, which would suit the debt-burdened DT very nicely. Telecom Italia needs restructuring and licking into shape, although DT may not be thinking very clearly about likely Italian reaction to a DT-led career-enhancement programme for great swathes of the workforce. For its part, France Telecom sees DT as a partner against the Baby Bells, and claims that any new Axis would be against its agreement with DT The DT/FT duo has already attacked the British market, allying with Energis to put fibre into Birmingham, London, and Manchester. The combined value of this new Axis would be around $180 billion, which would make it (just) the largest telco. The Italian board has some reservations about the role the German government would play after a merger. DT is expected to offer marginally more than Olivetti's 11.5 euros/share. The Italian prime minister said that in any merger, both sides must be on an equal fitting. It is expected that DT will end up with 56 to 60 per cent. A hurdle yet to be jumped is regulatory approval from the European Commission. The present situation is that after long bargaining sessions, Telecom Italia has approved the alliance conditionally: it wants to know how the German government will act while it still has a majority stake in DT. ®

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