Scuttlebutt: Italtel's Up for Grabs

VENICE -- Broadband World Forum Europe -- It wouldn't be a trade show without an acquisition rumor. The one doing the rounds here at the Broadband World Forum Europe 2004 in Venice is, fittingly, a potential Italian deal that could be worth more than $600 million.

Word has it that both Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Cisco Systems Inc. (Nasdaq: CSCO) are interested in taking a majority stake in Italian softswitch vendor and systems integrator Italtel SpA. The rumor first surfaced in an Italian newspaper, which also indicated the possible bid is causing the Italian company to postpone IPO plans (see Italtel Set for IPO, at Last).

Alcatel and Cisco say simply that they don't comment on rumors.

And Italtel? Executive VP Franco Serio says he can't comment directly on the issue because the company is still engaged in its IPO process and is in a quiet period.

Having said that, Serio then proceeded to comment just a little more on the issue, while still mentioning the vendor's show news (see Italtel Announces Triple-Play Contract).

"We're happy to see there's lots of interest in our success, and that two companies with very different propositions are looking at Italtel," he says, then hastens to add: "If it's true."

There's certainly very good reason to believe there's at least some element of truth behind the talk. For Cisco, the move would make sense because it would give Cisco greater control over one of its key avenues into the voice world (see Cisco Skips Class 5). It already owns 18.4 percent of the company, which had revenues of more than $720 million in 2003.

According to Serio, Italtel has 350 billion minutes of VOIP running through its softswitches each year, mostly across the national network of Telecom Italia SpA (NYSE: TI), itself a 19.4 percent owner.

Italtel also has all of Italy's fixed and mobile operators as systems integration customers, as well as some emerging business in the U.K. and some contracts in Latin America.

Take revenues like those, add the current price-to-revenue valuations in other telecom M&A deals, and factor in the potential valuations attached to Italtel's planned IPO, and any takeover could easily cost the buying party more than $600 million. Italtel itself could be worth over $1 billion.

It would make even more sense for Cisco to bid for a majority stake, which it could gain by buying private equity firm Clayton Dubilier & Rice Inc.'s 48.8 percent stake -- especially if Alcatel was sniffing around Italtel.

If the French vendor were to take control of Italtel (which it could do by acquiring the stakes owned by Italtel's three private equity stakeholders -- see the Italtel IPO story for full details), it would severely impede Cisco's softswitch position and IP telephony product development potential. (Clayton Dubilier & Rice officials declined to comment for this story.)

But why would Alcatel be so keen? Well, Italtel's existing business would undoubtedly be attraction enough, and Serio boasts that Italtel has a much broader and more impressive customer base than most people realize. And while Alcatel is building up its position in the next-gen voice solution space, it's not a trailblazer in the sector.

What might be a tipping point for Alcatel could be the outcome of a contract-tender process on the French vendor's front door, at France Telecom SA's (NYSE: FTE) international business unit Equant (NYSE: ENT; Paris: EQU).

Serio says Italtel is "very well positioned, but I can say nothing more." And Italtel already has its foot in the door in the French market as Telecom Italia moves aggressively into the French broadband market through the local loop unbundling process, and from a softswitch deal announced with alternative operator Groupe Cegetel (see Cegetel Picks Italtel for VOIP Over DSL).

So there's a decent case for either Cisco or Alcatel to be interested in holding the lion's share of Italtel, but industry analyst Kevin Mitchell at Infonetics Research Inc. has doubts about whether Cisco might make such a move.

"Sure, it makes sense. Italtel's doing well, so I'm sure they're an attractive target," Mitchell says. The question is whether Cisco has that much stomach for the carrier side of the VOIP market. "Cisco doesn't want to get into that necessarily. It's hard, really hard. They'll be happy selling gateways and happy selling the routers carrying all this traffic."

As for Alcatel, Italtel could make an attractive acquisition as Alcatel "hasn't chased VOIP as aggressively as other equipment vendors have," Mitchell says.

Either acquisition could benefit Italtel, Mitchell says. "Europe's moving slowly. Service providers in Italy are more aggressive [than other European providers] about voice-over-IP. Italtel could also use some help expanding out of Italy."

— Ray Le Maistre, International News Editor, and Craig Matsumoto, Senior Editor, Light Reading