AT&T Closes In on Telecom Italia Stake

After weeks of speculation about potential new investors, AT&T Inc. (NYSE: T) and Mexican mobile giant América Móvil S.A. de C.V. look set to each buy a stake in the holding company that controls Telecom Italia (TIM) . (See AT&T Looks at TI.)

AT&T announced over the weekend that it is in talks to buy a one third stake in Olimpia S.p.A., the company that holds a controlling 18 percent stake in the Italian incumbent operator, which generated €31.3 billion (US$41.8 billion) in revenues in 2006. (See Telecom Italia Reports '06.)

América Móvil is also negotiating to buy an equivalent stake, which equates to an indirect 6 percent holding in Telecom Italia. AT&T, which owns an 8 percent stake in the Mexican cellular operator, says it will only buy a stake in Olimpia if América Móvil does, too.

"This would be a good fit for our global business," says AT&T spokesman Niall Hickey. "Italy is an important market for us... [but] this isn't about taking control of Telecom Italia –- it's about working more closely with them. We would look to develop services with Telecom Italia, which has assets in a number of markets that we view as important, such as France, Germany, the Netherlands, and Brazil."

The assets in France, Germany, and the Netherlands are largely broadband access operations, while in Brazil the Italian incumbent owns mobile operator TIM Brasil . (See Italians Prep Big French DSL Rollout, Telecom Italia Upheaval Continues, and Italians Invade Germany.)

Hickey adds that AT&T already has a network presence in Italy, with a number of IP network nodes in major cities, but securing a stake in Olimpia would take AT&T's involvement in Italy "to a different level." To date, the two carriers have cooperated with a "bilateral wholesale agreement that has been in place for decades, and we are working together as founding members of the Open IPTV Forum (OIPF) ." (See Carriers, Vendors Form IPTV Group.)

AT&T has been beefing up its international operations in recent years through network investments in an IP/MPLS core infrastructure and in various access technologies, including DSL, Ethernet, and WiFi. It recently announced plans to invest $750 million this year in its international network and service development. Its main rivals in Europe for the accounts of major international business customers are Orange Business Services (formerly Equant), Verizon Enterprise Solutions (formerly MCI), and BT Group plc (NYSE: BT; London: BTA) -- its former partner in the doomed international joint venture, Concert. (See AT&T Invests in Global IP, AT&T Goes Global (Again), and AT&T and BT to Unwind JV.)

For América Móvil, which has numerous mobile operations throughout Central and Latin America, the move would give it a strong partner in Brazil, where it is already a significant mobile player, with nearly 24 million subscribers (a 24 percent market share). TIM Brasil had 25.4 million subscribers at the end of 2006, giving it a near 26 percent market share.

The two 33 percent chunks of Olimpia would be sold by Italian company Pirelli SpA (Milan: PECI.MI), which currently owns 80 percent of the holding company. Pirelli noted that AT&T and América Móvil have exclusive negotiating rights until April 30.

The two carriers have offered Pirelli €2.82 per Telecom Italia share, minus the value of Olimpia's net debt, which is believed to be €2.8 billion ($3.74 billion). After net debt is deducted, Pirelli would clear about €2.7 billion ($3.6 billion) from the deal, if it goes through.

AT&T would not comment on the total value of its proposed offer.

Telecom Italia's stock climbed 8 percent to €2.30 in Monday morning trading on the Milan stock exchange from its Friday closing price of €2.14.

The news follows months of speculation about potential investments in Olimpia following Pirelli's decision to sell a majority of its holding. Various companies have held talks with Pirelli, including Spanish giant Telefónica SA (NYSE: TEF) and Russia's Sistema JSFC (London: SSA). (See Eurobites: Turnaround Time for Telecom Italia and Eurobites: Upheaval, M&A, and Disaster.) Dresdner Kleinwort analyst Per Lindberg believes "the competitive climate in Europe will become considerably more heated" if AT&T and América Móvil are successful. "The move suggests that AT&T is seriously considering establishing itself as one of the world's global behemoths. By taking a stake in Telecom Italia, it gets a vital partner in South Europe and Latin America."

Adds Lindberg: "It could forebode a formidable pan-European campaign as additional spectrum (3G) gets on the blocs and M&A activity intensifies. If AT&T were to bid for [Dutch incumbent] KPN Telecom NV (NYSE: KPN) and [French competitive operator] Bouygues Telecom , then it would all of a sudden be a major contender."

AT&T declined to comment on whether it has held discussions with any other European carriers. "We don't comment on rumor and speculation," says Hickey.

Dresdner's Lindberg also sees an upside for Ericsson AB (Nasdaq: ERIC), which the analyst notes is "a core supplier to both AT&T (Cingular) in the USA and America Movil in Latin America... The global expansion of many of its top accounts certainly plays in its favour," notes the analyst.

— Ray Le Maistre, International News Editor, Light Reading