New Euro telecoms giant faces a daunting struggle

t Companies announce 'merger of equals' to create European powerhouse t Deal faces regulatory probe, while analysts and shareholders are sceptical t Savings could be 1bn euros, although no job cuts are planned for the 300,000 staff

DEUTSCHE TELEKOM and Telecom Italia were facing a daunting struggle last night to push through their $173bn (pounds 107bn) merger in the face of growing scepticism among shareholders, political uncertainty and the prospect of a lengthy, hostile regulatory investigation.

The deal, which would create the world's third-biggest telecoms operator by market value and the second-biggest by sales, was hailed by the two as a "merger of equals" that would create a European powerhouse.

Franco Bernabe of Telecom Italia, who will be co-chief executive alongside Ron Sommer of Deutsche Telekom, claimed the merged company would increase competition and could provide the springboard for further acquisitions in the US and elsewhere in Europe. The two companies expect to launch the as yet unnamed company by the end of this year.

But analysts pointed to the huge regulatory hurdles the deal faces and the problems the two companies could encounter in untangling existing joint venture arrangements.

There was also scepticism about whether the two operators, who until recently were state-owned monopolies, would achieve the projected 1 bn euros savings and how the two co-chief executives would split roles.

Mr Sommer said the costs of the merger would be less than 600m euros but indicated there was no intention of cutting the combined group's 300,000- strong workforce. Mr Bernabe joked that the co-chiefs would divide their role so that one worked while the other went skiing.

Meanwhile, doubts persisted in Rome about the German government's undertaking not to use its 40 per cent shareholding to interfere in the running of the enlarged business, given that it has refused to relinquish its voting rights.

The merger is designed to beat off a hostile $65bn bid for Telecom Italia from Olivetti. But yesterday shares in both Deutsche Telekom and Telecom Italia closed lower. At last night's closing the merger terms value Telecom Italia at 11.77 euros a share - just a shade above the 11.5 euros Olivetti is offering.

Clearance for the Olivetti bid from the Italian stock exchange authority, the Consob, is imminent, freeing the company to table a formal offer by the end of this month. The Olivetti offer has already obtained regulatory clearance.

"The Deutsche Telekom offer is not that appetising,'' said Francesco Mantica of Milan-based fund managers, Cassa Lombarda.

Analysts also highlighted the political uncertainties around the deal. "The presentation failed to address investor concerns about such crucial issues as the future of the German government's stake, fuelling the preoccupation that the whole deal may never happen,'' said Oriana Cardani, an analyst at Rasfin in Milan

The merger would value Telecom Italia at $67bn at Wednesday's closing price and would create a combined business with sales of 60bn euros, more than 100 million customers (including 72 million in their domestic markets) and 23 million mobile subscribers. The enlarged group would also cover 30 per cent of Europe's business telecoms market and one-fifth of its Internet subscriber base.

The two companies are projecting synergies of 600m euros next year and 1 bn euros by 2003, split evenly between increased revenues and reduced operating costs. They are also forecasting savings on capital expenditure programmes of 1bn euros over five years.

The merger is to be carried out through the creation of a new company domiciled in Germany. The two operators will exchange their shares for shares in the new company in the ratio of one for every one for Deutsche Telekom and three for one for Telecom Italia. Deutsche Telekom's shareholders will own 56 per cent of the new group and Telecom Italia's 44 per cent.

There will be twin head offices in Bonn and Rome; a supervisory board of 20, made up of 10 trade union nominees and 10 others nominated evenly by the two partners; a 12-strong management board led by the two chief executives; and an "advisory committee" sitting in between the two boards.

The chairmanship of the supervisory board will rotate annually from a German to an Italian nominee. The first chairman will be the former head of the German chemicals company, Henkel.

Earlier this week the European Competition Commissioner, Karel Van Miert, warned that the deal raised a "whole list of problems and hitches'' and that it was almost certain to face a full five-month probe.

Mr Bernabe conceded this yesterday, saying: "It will be a lengthy process, there will be lots of hurdles but we think we will overcome these hurdles and will get the deal done."

The first casualty of the deal, if it goes through, could be the Global One joint venture between Deutsche Telekom, France Telecom and the US long-distance carrier Sprint. France Telecom warned last night that the deal was "a clear violation" of its agreement with Deutsche Telekom. "France Telecom deplores this behaviour and will undertake whatever action is appropriate to protect its rights and the interests of its shareholders," it added.

However, Mr Sommer maintained that the deal did not endanger existing partnerships. "This is not aimed against existing partners. We see this merger strengthening Global One," he said.

Mr Bernabe was even more bullish, saying: "Limiting this alliance to a German-Italian grouping would be to create a weak competitor. We need global reach and we are planning the next step."

Telecom Italia may have to pull out of Wind, its joint venture with Telecom France and Enal in Italy. But there was speculation that the merged group might now bid for Sprint, in which Deutsche Telekom already has a 10 per cent stake, or even the UK telecoms operator Cable & Wireless.

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