Mobile and converged communications are becoming a truly global business, with Europe once again a stalking ground for operators from round the world. In a truly free market, AT&T would now have a significant holding in Europe via stakes in Telecom Italia and probably others, and we would have seen more rapid expansion by the emerging international operators from the Middle East, Russia and China. As it is, Europe remains protectionist of its once unassailable leadership of mobile communications, as indicated by the intense debate over whether its next spectrum allocations should be technology neutral, a question long since settled in most other parts of the world, with strong results for competition, and also international expansion. The failure this week of AT&T to take its hoped-for stake in Telecom Italia, via its holding company, shows what a peculiar market Europe remains, defending its operators and vendors from foreign influence, often in defiance of reason or shareholder value.
The danger of this ‘little Europe’ approach is that the region will not take advantage as swiftly as other areas of new and disruptive technologies, operator business models, and innovative carriers. But for the more dynamic of the European giants, the approach gives them a head start that, if exploited effectively, could ensure they become global players too, breaking out of their EU borders and fending off the new potential giants such as MTN, Altimo, Orascom and China Mobile. On the vendor side, Alcatel has demonstrated the way this can work, with its acquisition of Lucent. On the operator front, Telef’nica is the national incumbent with the strongest shot at gaining real global presence in the new generations of pre-4G and quadruple play businesses, as well as tapping into some of the most lucrative emerging economy markets for more traditional services. The Spanish company, which has already acquired O2 and has been consolidating its Latin American activities into a far more streamlined and impressive business recently, has now gained significant influence in Telecom Italia through its own deal with the company, one that has the advantage of allaying Italian fears that control of their telco would pass outside the country. This points to some long awaited rationalization of the European operators, which should result in an elite group of truly cross-border players to challenge Vodafone; but perhaps more importantly to Telef’nica’s growth strategy, new opportunities in Latin America.
The €4.1bn ($5.6bn) deal by Telef’nica and three Italian financial institutions ensures control of Telecom Italia remains in national hands and was crafted to avoid the sort of political opposition that sent AT&T and its co-bidder, Mexican associate America M’vil, home. Holding company Pirelli and the other major stakeholder, the Benetton family, have now agreed to sell their 18% controlling stake in Telecom Italia to a group that includes not only Telef’nica but Italian banks Intesa Sanpaolo and MedioBanca (which had also discussed a similar arrangement with AT&T), and insurer Assicurazioni Generali. The deal does not include Silvio Berlusconi or his Mediaset empire – the former prime minister had, somewhat mischievously, said he would bid for the telco to prevent it leaving Italian hands, but despite some real synergies with his media group, the suggestion was not taken seriously.
The amount paid under the Telef’nica-led agreement implies a value of €2.82 ($3.85) a share, a 24% premium over the €2.27 at which Telecom Italia shares closed the Friday previous. The consortium members will place their shares in a new holding company, called Telco SpA, which will control 23.6% of Telecom Italia voting shares. The Spanish company does not have majority control of Telco SpA, with just 42.3% – a vital element for the Italian government, and another example of how restricted European companies are in their efforts at consolidation and economies of scale, even within EU borders. Although Telefonica paid a slightly higher rate for its shares than its partners, and has the largest stake, it will still gain only two board seats out of 15 in the telco. Sintonia, an investment vehicle owned by the Benetton family, will retain 8.4% in Telco SpA. Telefonica has almost €3 billion in cash from the recent disposal of Airwave O2, the UK’s emergency services wireless network, and should raise a similar sum from the imminent sale of Endemol, the Dutch based TV production house.
Telecom Italia has been consistently thwarted in its efforts to turn around its fortunes, often by the machinations of its government and their rising paranoia about foreign control – three of the four cellcos are now in non-Italian hands. Wide ranging talks last year about partnership with the Murdoch Corporation, like the AT&T bid proposal, foundered on these factors. But something had to be done – even with the premium being offered for the shares, Pirelli will book losses of more than €3 billion on its investment, while the Benetton family has lost more than €1billion. After being something of a poster child for fixed/mobile convergence and quad play, the telco dabbled last year with the idea of a break-up, splitting off the most profitable mobile arm. Although it backed away from this apparently retrograde step, since mid-2006 TI has been not only in turmoil, but far more conservative about key trends such as convergence.
Cautiousness wins few battles in telecoms, and so the partnership with Telef’nica – after its own years of stagnancy, now a more vibrant and expansionist force – could help TI strategically as well as financially. Roaming deals in Europe and some synergies between the respective telcos’ mobile and broadband units across the continent will be useful, though other partners will still be required to match Vodafone in coverage or create a real pan-European quad play. It may be a distraction to see this partnership as a first step towards that goal, and indeed the real advantages may well come from cooperation in Latin American, one of the most important of the emerging mobile markets. But conversely, Italian politicians are being over complacent in the view, expressed by some, that Telef’nica’s primary interest will be in TIM Brasil, and that it will be virtually a passive investor in the European activities. The Spanish company has been one of the most active European players in recent times in spreading its influence more widely and seeking to provide a counterpoint in the region to Vodafone and multinational broadband and media operators. We would expect Telef’nica to leverage its position in TI to the maximum, and to seek to extend its stake when the proposed capital increase of €900 million takes place.
Latin America will be the jewel in the crown of the deal though, and Telef’nica’s success will be a blow to America Movil and its chairman, Mexican billionaire Carlos Slim Helu. The two companies are the main protagonists in the fight for control of the fast growing Latin American cellular market. Telef’nica became the leader in the region in 2004 when it acquired the Latin American assets of BellSouth for $5.85 billion. BellSouth’s activities had been in Argentina, Chile, Peru, Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and Panama, and they gave Telef’nica 40.5 million additional mobile subscribers. Before the TIM deal, it had 74 million subscribers in 13 Latin American countries and will now also add TIM Brasil’s 25.4 million customers. TIM Brasil is the country’s second largest cellco out of eight players, and the country is already the second biggest revenue generator for Telef’nica after Spain, bringing in 18.2% of the total in 2005 through fixed line, broadband and cellular services, operated under the brand Brasilcel.
America Movil has 93 million subscribers in 14 countries throughout Latin America. It owns Mexico’s biggest cellular company, Telcel, which has 36 million subscribers and brings in about half of the company’s sales; and 98% of Telecom Americas in Brazil.
There is considerable anger at the Italian government’s derailing of the AT&T deal, with critics claiming this shows an insular view that will make Italy uncompetitive and weaken the EU as a global force. The US Ambassador to Rome, Ronal Spogli, in an interview with daily newspaper Corriere della Sera, said: ‘It would be best to focus less on who wants to invest and more on the fact that Italy is in last position among European countries in terms of growth of GDP, salaries and productivity.’
Viviane Reding, the EU Commissioner for telecoms and the media, was also dismayed, saying in an interview: ‘I am convinced that we need to remain vigilant against these protectionist proclivities. This episode shows that there are still protectionist pressures in member states that affect the telecoms sector as well as the other strategic economic sectors, and we will act to ensure they cannot hold sway.’