Swisscom AG (NYSE: SCM) is hoping to create a Central European carrier superpower through acquisition of its neighboring incumbent, Telekom Austria AG (NYSE: TKA; Vienna: TKA).

The Swiss operator has made public overtures in the past, with CEO Jens Alder recently restating his interest following the carrier's 2003 financial results announcement (see Swisscom Reports Bumper 2003). Swisscom nearly doubled its net income last year, posting a profit of 1.6 billion Swiss francs (US$1.26 billion) and keeping tight control over costs (see Swisscom Reports Bumper 2003 and Swisscom Cuts 655 Jobs).

Now Alder has told Lehman Brothers analyst Graeme Pearson that Swisscom is still hoping the merger will happen, that the Austrian carrier is Swisscom's prime M&A target, and that politics, not the price, is the barrier to a merger.

Telekom Austria, which also recently announced a net profit for 2003, has a current market cap of $7.2 billion (see Telekom Austria Boosts Net Income).

Despite the political barrier -- the Austrian government is unsure of the impact of a merger -- the Lehman team believes a Swisscom bid is still possible and that Telekom Austria's shares are undervalued, compared with the rest of the market. The Austrian government holds 47.2 percent of Telekom Austria shares, but the country's privatization agency is considering placing about 20 percent, nearly half of its holding, on the public market this summer. At present, 52.8 percent of the shares are in free float or held by employees.

Buying the Austrian operator would give Swisscom the leading fixed and mobile operators in Austria, as well as instant access to the growing Eastern European market, where Telekom Austria has majority stakes in mobile operators in Slovenia and Croatia, and an ISP in the Czech Republic.

— Ray Le Maistre, International Editor, Boardwatch