Monday, April 2, 2007

E-mail Story     Print     Feedback

AT&T, America Movil Team To Control Telecom Italia

AT&T and Mexican communications magnate Carlos Slim Helu's mobile phone unit America Movil are in negotiations with Pirelli & C. S.p.A. to pick up an indirect controlling minority stake in Telecom Italia.

The deal is believed to be worth about $7.5 billion for what will represent a 12-percent stake in the Italian carrier.

The somewhat complicated deal would see AT&T and America Movil each picking up a one-third ownership of Olimpia S.p.A, the holding company that owns 18 percent of Telecom Italia. The other 82 percent is publicly traded, but 18 percent has proved a large enough stake to effectively control the carrier. Telecom Italia bylaws award 80 percent of board seats to whatever proposed list gets the most votes.

Pirelli owns 80 percent of Olimpia so, when the dust clears, it will be left with just a 14-percent share; the Benetton family's holding company Sintonia owns the remaining piece of Olimpia. In addition, the deal includes a put option under which Pirelli and Sintonia can force AT&T and America Movil to buy their remaining stakes in Olimpia a year from now, at the current price being paid - a move that protects Pirelli and Sintonia from any decline in Telecom Italia value during the next 12 months.

The offer is believed represent a payment of about $3.74 billion each for AT&T and America Movil, with Pirelli getting $3.6 billion of that and the rest earmarked for debt. The exact amount remains a bit obscure because the terms call for payment of $3.77 million "minus the net debt of Olimpia on the closing date of the transaction," a number that obviously won't be known with precision until the deal closes.

Pirelli has been trying to get rid of most of its stake in Telecom Italia for some time and last month reportedly was negotiating with a banking consortium for a buyout (TelecomWeb news break, March 14). Reports were that the consortium was willing to offer $3.57 million, but Pirelli wanted more - as it is apparently getting with the joint offer from AT&T and America Movil.

The Pirelli board, in a statement saying it had met yesterday (Sunday) and had approved the AT&T/America Movil offer, added a caveat that investment bank Mediobanca and insurance giant Generali do have a right of first refusal on the Olimpia shares. That right was part of a shareholder agreement signed in October 2006, Pirelli's board said, and they could exercise their rights, killing the agreements with AT&T and America. Were that to happen, AT&T and America Movil each would get a $21 million breakup fee.

Outside of the right to first refusal, Pirelli said it had granted AT&T and America Movil exclusive negotiating rights until April 30. If they can't hammer out a definitive deal by then, it will apparently be open season for any other interested bidders - if there are any. The most immediate problem that Pirelli has faced in selling its share in Olimpia is that, last month, Telecom Italia cut its revenue growth and profit forecasts for the second time in two years because of increased competition and pressure from regulators to reduce prices. Sales are forecast to rise between 1 percent and 2 percent a year through 2009, Telecom Italia said, a change from a year ago when the telco said its revenue would rise as much as 4 percent per year until 2008. In addition, profit margins will be lower than previously estimated.

Meanwhile, Pirelli and Olimpia are believed to have plowed $4 billion of their own cash into Telecom Italia, resulting in pressure from Pirelli shareholders who want the companies to wash their hands of the carrier.

Complicating the whole thing is the fact that the Italian government isn't particularly enamored at the possibility of more foreign participation in the country's telecom providers. Italian daily Corriere della Sera talked to Italian Communications Minister Paolo Gentiloni, reporting that his ministry, which had only learned of the AT&T/America Movil deal yesterday afternoon, was monitoring the situation with "greatest concern" over control of Telecom Italia potentially falling into the hands of non- Italian ownership.