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Telecom Italia Lines Up Tiscali Buys

Telecom Italia SpA (NYSE: TI) has lined up deals to buy Tiscali's French and German operations, according to an industry source close to the negotiations.

Such a move would strengthen the Italian operator's broadband penetration in two of Europe's key territories, where it has already made inroads through an acquisition (Germany) and by unbundling the local loop (France).

It would also leave Tiscali as a shadow of its former self, and cap eight months of asset sales during which the pan-European ISP has sold off businesses in Austria, Belgium, Denmark, Norway, Sweden, Switzerland, and its mobile operations in South Africa.

Tiscali declined to comment on any potential sale of its French and German operations. A Telecom Italia spokesman notes that Riccardo Ruggiero, head of the operator's fixed-line business, told investors late last week that an acquisition of Tiscali's French unit was being considered but that there was no interest in the German business.

But a European telecom executive close to the negotiations says that, in addition to buying the French unit, Telecom Italia is in the process of acquiring control of Tiscali's German business, but that it may not necessarily do so directly.

The source says the carrier might organize the deal through its German subsidiary, HanseNet Telekommunikation GmbH, acquired in July 2003, or create a new company to finalize the deal (see Italians Invade Germany and Telecom Italia Buys HanseNet).

No timescale or price information was available, though the source believes the acquisitions are now being handled by the operators' respective lawyers. Telecom Italia said at the time of its HanseNet acquisition that it planned to spend another €250 million to €350 million (US$328 million to $460 million) on European broadband acquisitions.

It's likely the deals will involve a fair amount of cash, as Tiscali, which has undergone a financial upheaval in the past year to prevent it sliding into major financial difficulties, needs funds to repay a €250 million bond due in July (see Tiscali Reports H1, Names Chairman).

Its French business, which has about 340,000 DSL customers and which is offering VOIP services as well as high-speed access, is valued at between €200 million and €300 million ($262 million to $394 million), and has been on the block for a while.

According to various local media reports, Tiscali France has attracted considerable local interest -- from the likes of Neuf Telecom, Groupe Cegetel, and Bouygues Telecom -- and at least one non-French suitor in the form of Deutsche Telekom AG's (NYSE: DT) business unit, T-Online International AG.

Tiscali's German unit had about 230,000 DSL subscribers at the end of 2004 and is considered one of the jewels in Tiscali's remaining crown and less likely to be sold. But the French unit is also regarded as a core business unit, and that hasn't stopped Tiscali from erecting a "For Sale" sign outside the service provider.

Further Expansion for Telecom Italia
For the Italian incumbent, buying both Tiscali businesses would strengthen its broadband business in two of its key foreign target markets.

In Germany, Telecom Italia has transformed HanseNet from an Ethernet-over-fiber access provider into a multiservice broadband player with 240,000 customers (more than double its 2003 number) and 2004 revenues of €160 million ($210 million).

It has also expanded from its original Hamburg base and now offers DSL service in other areas. To help with that growth, Telecom Italia has splashed some cash with the likes of Alcatel (NYSE: ALA; Paris: CGEP:PA) and Italtel SpA and plans to invest €130 million ($170 million) in further expansion this year (see HanseNet Picks Alcatel and Italtel Tops EMEA VOIP Ranking).

Adding Tiscali Germany to the mix would double the existing customer base and help spread Telecom Italia's broadband brand, Alice.

Its major competition is, of course, T-Online International, which has 3.2 million DSL subscribers in Germany (see T-Online Reports 2004 Results).

Acquiring Tiscali France would propel Telecom Italia, which has about 40,000 DSL subscribers in eight French cities at present, into third spot in that market, trailing only France Telecom SA's (NYSE: FTE) ISP, Wanadoo SA, and Free, the triple-play operator of Iliad (Euronext: ILD). (See Iliad Ramps Up Broadband to the Homer.)

Tiscali: Honey, I Shrunk the Company
When will Tiscali stop selling its body parts? Selling the French and German units would leave it with broadband operations in Italy, the U.K., and the Netherlands, and dialup customers in those countries and the Czech Republic, a far cry from the pan-European operations the company had just a year ago.

But Tiscali's financial woes have forced it into numerous asset sales and a new capital issue, and now it looks as if the company will shrink even further as it looks to turn around its financial fortunes. (See Tiscali Reports Q4 Results, Tiscali Sells Danish Business, Tiscali Reorganizes, Tiscali Raises Funds, Tiscali Sells Belgian Unit, and Telenor Buys Tiscali Unit.)

— Ray Le Maistre, International News Editor, Light Reading

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