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Euro Megamerger in the Offing

Austria's privatization agency has confirmed it is considering the sale of the state's 47.2 percent stake in national operator Telekom Austria AG (NYSE: TKA; Vienna: TKA) to nextdoor neighbor Swisscom AG (NYSE: SCM), a long talked-of deal previously hampered by political issues (see Swisscom Plans Euro Übercarrier).

Österreichische Industrieholding AG (OIAG), the agency that holds the stake, issued a statement to say it was considering two options: an initial sale of 17 percent on the Austrian stock exchange, with the rest to follow later; or the sale of an unspecified stake to a strategic partner.

The agency said talks had been held with Swisscom regarding the second option, while Swisscom has said it is only interested in a minority stake if it can be guaranteed a majority holding in the future.

Some Austrian politicians are concerned at such a major national company losing its independence, and favor the expanded listing on the Vienna exchange. Swisscom is still controlled by the Swiss government, which holds a 62.7 percent stake. OIAG executives are due to discuss the matter further this coming weekend.

A merger of the incumbents would create a central European carrier with annual sales of about $13 billion. It would not only dominate the fixed and mobile sectors in Austria and Switzerland, but also own mobile operators in Slovenia and Croatia, a major ISP in the Czech Republic, and Swisscom Eurospot, a pan-European WiFi operator.

The WiFi operator is Swisscom's only current asset outside its home territory after it sold its mobile carrier holding in Germany earlier this year (see Permira Buys Swisscom Unit). Analysts say this leaves the incumbent too exposed to its home market, where profits are slipping (see Swisscom Reports H1 Profit).

A merger would also give the combined carrier greater financial muscle and flexibility to increase its presence in the growing Eastern European market, which is still offering growth opportunities in both the fixed and wireless sectors, especially in the eight countries that have recently joined the European Union (see LR Insider Analyzes Eastern European Telecom Market).

Should the two operators join forces it would be the second merger of national operators in Europe, following the coupling of Swedish and Finnish incumbents to form TeliaSonera AB (Nasdaq: TLSN) in 2002 (see TeliaSonera Starts Trading). Other transnational merger discussions have taken place, including talks between Spain's Telefònica SA and Dutch carrier KPN Telecom NV (NYSE: KPN) several years ago, but none have progressed as far as the potential Swiss/Austrian combo.

Swisscom's share price closed Tuesday at $33.14, up from Monday's $32.87, valuing the operator at $22 billion. Telekom Austria closed Tuesday at a 12-month high of $34.50, valuing it at nearly $9 billion.

— Ray Le Maistre, International News Editor, Light Reading

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