Over the weekend AT&T announced that it has reached an agreement with Pirelli (owner of Telecom Italia) to invest in the company. Pirelli owns 80% of Olimpia (a holding company) which in turn owns 18% of Telecom Italia (TI) and is its largest single shareholder. AT&T has made an offer to buy 33% of Olimpia, with America Movil (the largest wireless company in Latin America) also to purchase a matching slice of the company. Pirelli will continue to own the remaining third.
Ovum analysts Jan Dawson, Mike Cansfield, Stefano Nicoletti Comment:
This is a complex transaction in itself, but also difficult to make a judgement call on. For the four parties involved, on the upside:
· "Pirelli - a way out at last. When it bought into TI in August 2003 Pirelli was seen as a white knight frustrating the ambitions of Deutsche Telekom to create a European leviathan. But Pirelli is, and remains, a tire manufacturing company. Rumours of it wanting out of TI have surfaced from time-to-time over the past year. At last it seems to have found an acceptable suitor for both itself and other shareholders"
· "TI - in need of partners. TI has been having a bad time at home, under pressure from BT Global Services (Italy is now BT's second largest national market) which has captured key reference accounts like Fiat through its acquisition of Albacom. Aligning with AT&T gives it a strategic partner to compete with BT, DT's T-Systems and Orange Business Services, (formerly Equant) and, if it can work with Cingular (now part of AT&T) and America Movil, it has the potential to leverage scale economies in wireless. In a consolidating industry where size matters it may have decided that it was better to accept this modest investment as a way of cementing this relationship"
· "AT&T - no longer a hunted dinosaur, but now a nimble hunter. Now consolidation in the US is almost complete, the new AT&T now has the wherewithal to start to invest globally. A few weeks ago we saw it announce its organic plans and now we see it is undertaking inorganic investments too. Assuming it has a deal with TI for access services, this could be a low cost way to fix this problem in Italy obviously) but also in France, Germany and Holland. (TI has 8.7million broadband customers across Europe). If you add in a further 25.4 million mobile customers in Brazil this becomes an even more interesting proposition. As a brand with global recognition, and in an era of hyper competition, the big European players should be very concerned to see a reborn, aggressive AT&T"
· "America Movil - in need of scale both inside and outside Latin America. America Movil has 124 million customers spread across 15 countries in Latin America. The market in this region is expanding, but it can see maturity and slowing growth rates on the horizon. Linking up with AT&T gives it links into Cingular (good for shared product development and roaming revenues into Latin America), and with TI a major uplift in customers in one of its major markets plus a toe-hold in Europe. In short, it looks a win-win deal."
"So whilst we can rationalise this transaction, there is also a downside. Leaving aside Pirelli and America Movil, if we look at AT&T and TI:"
· "AT&T has not covered itself in glory in the past with its overseas minority investments. The potential to repeat past mistakes is present in this deal. Furthermore, given that only 8 out of the Fortune 500 multinational companies are based in Italy, other markets would seem more attractive to us. With regards to Latin America, there are simpler ways it could have reached agreement with America Movil."
"Ownership and control of TI is a political football in Italy and some politicians have already expressed their dislike for a 'non-Italian' solution. The intertwining of business and politics is not a great omen for success. Italian investment Bank Mediobanca and insurer Generali, already minority shareholders, do have a right of first refusal in the transaction, so they could easily step in and put AT&T's and America Movil's position at risk, but they should pay a price premium that maybe they are not ready to pay today. Over the past year the company has been in turmoil with strategic u-turns and resignations, so doubts exist on whether it can take advantage of this opportunity"
"On balance we are not convinced the upside possibilities outweigh the downside probabilities."
