If the deal received regulatory approval, it would produce Europe's largest telecoms operator with a market capitalisation of $170bn - twice the size of BT and dwarfing its market share.
But BT has remained undaunted; the former UK monopoly has been busy focusing on its own expansion into Asia, with the purchase of a stake in Japan Telecom, along with its partner AT&T.
"What is happening around the world can be likened to a dance floor, with everyone looking for partners," says a spokesman for BT. "We are well-placed with lots of alliances. Consolidation will continue and we will continue to do our thing."
There may well be grounds for BT's apparent lack of concern. Rather than the marriage of two operators focused on increasing market share and cutting distribution costs, both Deutsche Telekom and Telecom Italia are losing custom to nimbler upstarts in their home markets. Neither has made inroads abroad or attacked their overmanned bureaucracies. Both need the merger to take the pressure off at home: Deutsche Telekom has lost a third of its long-distance business to rivals and is desperate to expand internationally, while Telecom Italia is keen to escape a hostile bid from Olivetti.
BT is also aware that it is by no means a done deal. The Italian government seems to be regarding it with lukewarm enthusiasm, because the German finance ministry has failed to make a commitment to sell its remaining 72 per cent stake in Deutsche Telekom.
European Commission insiders say there are two areas of concern; one is competition in the fixed-telephone network in Italy, the other is the mobile phone market in Austria, in which both companies have a sizeable stake. But some analysts argue that Competition Commissioner Karel van Miert should not interfere.
"There is no real reason why the EU should get involved," says Peter Roe, telecoms analyst at Paribas. "Because it is not really going to affect the competitive market in either Italy or Germany; it is not as if these two companies are active in the same market." Mr Roe said the only problem emerges with Deutsche Telekom's long-standing alliance with its French equivalent which, were the German/Italian deal to go through, would begin to look like a Continental monopoly.
Since deregulation of the European telecoms sector began early last year, consolidation has been rapid. Only a handful of communications companies are likely to survive. BT intends to be one of them.
Its strategy is worldwide. Over the past year it has focused on the Asia/Pacific region. As well as the Japanese invest-ment with AT&T, it has ploughed more than pounds 630m into joint ventures in Hong Kong, Korea, Singapore, Malaysia and India.
"By piecemeal acquisition in Europe and Asia, BT is building a global business," said Mr Roe.
BT has already achieved a presence in most European countries, while its $10bn global venture with AT&T, the US giant, has restored credibility with international clients.
Chief executive Peter Bonfield has overseen international expansion while continuing to dominate the UK residential market with 80 per cent of all customers.
Whether the Deutsche Telekom/Telecom Italia deal goes through or not in this aggressive market, further consolidation is inevitable.
"This deal would have been unthinkable six months ago," says Mr Roe. "But it should now be looked on as the first stage, with future mergers forcing the efficiency of telecoms companies worldwide."Reuse content