Why, In Post-Berlusconi Italy, The Government Won't Block A Telefónica-Telecom Italia Merger

 @AlexCKaufman
on September 25 2013 5:54 AM
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Silvio Berlusconi, the former prime minister of Italy convicted of tax fraud earlier this summer, once stood in the way of foreign takeovers of struggling Italian companies. REUTERS/Alessandro Bianchi

Just three years ago, a bellicose Silvio Berlusconi would habitually quash a foreign company’s purchase of an Italian firm -- as he did when Air France-KLM (EPA:AF) attempted to buy struggling Alitalia.

However, after leaving Europe’s fourth-largest economy floundering in the hands of banks and insurers, his People of Freedom Party, which still controls a large swath of Italy’s ruling coalition, seems ready to budge on Spanish Telefónica S.A.’s (NYSE:TEF) gradual takeover of Telecom Italia SpA (BIT:TIT), analysts said.

“We have long stated that we thought a merger between Telefónica and Telecom Italia would be positive, but regulatory and government intervention likely wouldn’t allow it,” Allan C. Nichols, an analyst at Morningstar, wrote in a note on Tuesday. “However, it appears that Italian government angst is declining given the recessions in both countries, Telecom Italia’s overleveraged balance sheet, and the potential separation of its fixed-line network.”

Telefónica announced a deal on Tuesday to take a controlling stake in Telco, the largest shareholder in Telecom Italia, for 324 million euros, or $438 million, lifting its stake to 66 percent from 46 percent.

Earlier this month, the country’s economy minister said the government had no plans to intervene in foreign takeovers of domestic companies.

“We don’t have any strategy to prevent such investments,” Fabrizio Saccomanni told Reuters in a television interview. “We don’t necessarily have a role to play in single negotiations and I think it should be up to the companies involved to decide on the terms and conditions for foreign takeovers, or something like that.”

Such rhetoric sounds humble compared to Berlusconi in 2008, when the pugnacious then-prime minister, recently convicted of tax fraud, vowed to block a purchase by Air France as Alitalia lurched ever-closer to bankruptcy.

“The reply to Air France will be given by the next prime minister and will be a dry and complete No,” Berlusconi said at the time. “Not because it is against France, but against the conditions set.”

But the Telefónica and Telecom Italia deal still could face some stringent regulatory scrutiny in a country whose economy remains robust, rather than retrograde: Brazil.

Both Telefónica and Telecom Italia operate profitable mobile phone carriers in South America’s powerhouse. Unnamed sources told the Financial Times that Telecom Italia’s Spanish rulers may force the company to sell its operations in Brazil.

Nichols also agreed that Brazilian President Dilma Rousseff’s government would be unlikely to allow the two companies’ Brazilian businesses to be combined.

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