The world's second largest telecoms group was due to be formed after the Telecom Italia board approved plans to merge with Deutsche Telekom last week.
Telecom Italia gave its preliminary backing for plans to merge with the German operator, creating one of the world's largest telecoms operators - with market capitalisation of about $180 billion - that would tower over competitors in Europe.
But analysts are divided over how rivals will react if the deal goes ahead and clears tough regulatory hurdles likely to be presented by the European Commission.
One camp of analysts said other European telecoms companies such as BT and France Telecom (FT) will spring into action, seeking mergers and acquisitions in an attempt to compete alongside the combined organisation. Another group claimed that the merged firm's competitive edge will be hampered by efforts to integrate the two businesses.
John Moroney, principle consultant at Ovum, said: 'It will be a catalyst to rival other mergers and acquisitions. It leaves BT and FT in untenable positions and I could imagine these two combining.
'At the moment, they are facing a big Deutsche Telekom. Now they will be facing a huge company that will be twice the size, covering about one third of the European market,' he added.
However, both Deutsche Telekom and Telecom Italia are under huge pressure to cut call charges and reduce operating expenses and staff numbers. This would have an impact on the effectiveness of the operator, according to Robin Duke-Woolley, senior consultant at research firm Schema.
'It is likely to make them less competitive rather than more. As long as the merger doesn't change the regulatory environment, it would be good for BT because it would reduce competition until the two companies sort themselves out,' said Duke-Woolley.
But Moroney predicted that BT would come under pressure to maintain a high profile in Europe to protect its international joint venture with AT&T. 'BT needs to act quickly to reposition and grow its market - the easiest way to do that is through merger and acquisition.'
'BT's alliance with AT&T is their gateway into Europe. If BT fails to deliver, the whole alliance looks shaky to me. BT has to make its stake as one of Europe's leading telcos,' said Moroney.
However, the operator facing obstacles is France Telecom, which would lose an important strategic partner if Deutsche Telekom was forced to sever its close ties with the French operator. The companies' chairmen sit on each other's boards and each holds a two per cent stake in the other. The companies, along with Sprint, also own Global One.
Karel Van Miert, European Commissioner for competition, said last week the planned merger between Deutsche Telekom and Telecom Italia 'would merit an in-depth inquiry'.
He added that he had 'a hunch' it would go to a second phase, four-month long investigation.
'If we have three big incumbent operators coming together, two merging and one as a partner, it creates all kinds of problems,' he said.
Speaking at a European Parliament economic and monetary affairs committee meeting, Van Miert said any merger between the two companies would have to be notified to the commission, which would not accept the merger without 'conditions being imposed'.
'Problems would be created in other member states, such as Austria, because the companies compete there with each other. There are quite a lot of hitches that need to be addressed, and which must be dealt with the greatest possible transparency,' he said.
Van Miert said he had other concerns relating to the lack of competition in the Italian telecoms market and said he had warned Telecom Italia a year ago that if it wished to enter into an alliance, the Italian market had to become more open to competition.
'The situation has changed a lot since then, with Mannesmann and Olivetti emerging as operators - the market is moving more quickly now,' he said.
Other concerns include Telecom Italia's proposed integration of its mobile unit, Telecom Italia Mobile (TIM),Van Miert added. Telecom Italia already owns 60 per cent of TIM and was planning to acquire the remaining 40 per cent to fend off Olivetti's hostile take-over offer (see box).
'I had concerns because this re-integration would contribute to upsetting fair competition in the mobile area,' said Van Miert. 'Things must be transparent between voice telephony and mobile telephony - clear separation is needed. Telecom Italia's planned re-integration of TIM will not happen if it merges with Deutsche Telekom,' he added.
Van Miert said he could not anticipate the result of the commission's inquiry, but claimed it was a 'large case with competition conditions which other telecoms companies will complain about'.
A commission source said that for a clearance of the merger, Deutsche Telekom would 'be very well advised' to divest its interest in the WIND joint venture with France Telecom, that holds the third Italian mobile licence and which operates a optical fibre network.
OLIVETTI'S BID UP IN THE AIR
The merger between Telecom Italia and Deutsche Telekom was designed to fend off a hostile bid for Telecom Italia by Olivetti. Olivetti's formal prospectus was approved by the Italian stock exchange regulator last week for the Italian company's voting stock. Despite the fact that the Telecom Italia board approved the plans for the merger with the German telecoms organisation, there is no guarantee that it will go through.
At the beginning of the month, Telecom Italia shareholders failed to support its chief executive's plan which would have effectively blocked the hostile takeover of the Italy's largest teleco by Olivetti.
Franco Bernabe needed the approval of 30 per cent of the company's shareholders for his plan to stop the takeover and expected a 35 per cent turnout. But less than 23 per cent of shareholders turned up for the meeting.
The plan included converting non-voting shares into ordinary stock, a buyback of 10 per cent of Telecom Italia's shares and a $24 billion purchase of the 40 per cent stake in Telecom Italia Mobile that Telecom Italia does not already own.
Despite the setback, Bernabe vowed to fight on and is now setting his hopes on the bid with Deutsche Telecom to fend off Olivetti.
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