Global Insight Perspective | |
Significance | Telecom Italia has paid 675 million euro (US$856 million) in cash for AOL Germany, which equates to a 281-euro price tag on each AOL Germany access customer. |
Implications | Following the acquisition, Telecoms Italia has become Germany's second-largest broadband operator. |
Outlook | The takeover of the country's third-largest broadband operator represents a Telecom Italia push into broadband markets outside of Italy. |
The Italian telco outbid other contenders, including German ISPs, United Internet and freenet.de, and Dutch telco Versatel (see Germany: 6 September 2006: Four Bidders Line Up for AOL's German Unit). The deal is expected to be finalised in up to six months, pending the regulatory approvals. Dresdner Kleinwort and Deutsche Bank advised Telecom Italia, while Citigroup advised AOL.
The disposal is part of AOL Time Warner's efforts to restructure its European business by disposing of its declining German and U.K. units and focusing on its core assets. This involves disposing of its access businesses, while retaining the respective portals, in an attempt to boost online advertising revenues. According to the terms of the deal with Telecom Italia, AOL Time Warner will provide co-branded audience services and handle online advertising sales. However, financial terms of the audience services partnership were not disclosed.
AOL Time Warner is actively seeking a buyer for its U.K. business and has entered into exclusive negotiations to sell its access business in France to Neuf Cegetel (see United Kingdom: 2 June 2006: AOL Seeks Buyer for U.K. Operation, 1 August 2006:AOL U.K. Sale in Doubt over Routing and France: 18 August 2006: Neuf Cegetel Set to Expand Broadband Coverage; Leads Race for AOL France).
Outlook and Implications
- Consolidation: Telecom Italia has taken over more than 2.4 million AOL Germany customers, of which nearly 1.1 million subscribed to its broadband offering at end-June 2006. The move puts Telecom Italia towards the forefront of the German broadband race. It first entered the German market with the acquisition of Hansenet in 2003. Together with its existing operations in Germany, the Italian telco now boasts more than 3.2 million subscribers, including nearly 2 million broadband customers, thereby becoming Germany's largest broadband operator after incumbent Deutsche Telekom.
The acquisition of AOL Germany signals that Telecom Italia is committed to pursuing its international expansion strategy. Germany is now the group's third non-domestic European market. Including its presence in Italy, France, the Netherlands, and Germany, Telecom Italia currently serves approximately 9 million broadband subscribers in Europe.
Pressure on the German telecoms market has intensified, with leading players—including MobilCom, Vodafone/Arcor, and Telefónica's O2 Germany—consolidating their positions and reinventing their strategies as integrated service operators, while smaller players scale their presence upwards, with the United Kingdom's British Telecom (BT) eying potential acquisition targets in Germany. Given Italian broadband operator Tiscali's alleged exit from the German internet market, this could lead to further consolidation in the German market (see Germany: 17 August 2006: BT Germany Eyes Acquisitions and 16 August 2006:Tiscali Seeks Buyer for German Assets). - Competition: Whether Telecom Italia can sustain the growth of its combined German operations remains to be seen. AOL has recently struggled with customer losses, prompting the parent company to exit the loss-making operations and dispose of AOL's access businesses in Germany and the United Kingdom. Telecom Italia will face fierce competition in Germany, with the major players readying for a broadband price war. The Italian telco has emerged now as the major rival to Germany's dominant player, Deutsche Telekom. The latter has itself has also experienced customer defections, and recently stepped up efforts to revive sluggish growth. Following the price reductions of its combined internet and phone-service packages, by as much as 30%, last month, Deutsche Telekom announced that it registered more than 200,000 customers for its new bundled internet and telephony offers, a figure that beat its expectations.
Germany has a dynamic broadband market, with demand for high-speed internet access expected to nearly double over the next three years. At end-2005, there were 10.4 million DSL lines in operation, up by 55.2% y/y from 6.7 million in 2004. Competition has been strengthening, but operators are still dependent upon the incumbent’s DSL infrastructure. Deutsche Telekom accounted for 60% of the country’s total broadband lines, including DSL, broadband cable, satellite, and power lines. - Reshuffle at Home: Telecom Italia has recently stirred controversy at home, with plans to split its fixed-line and mobile assets into separate entities and offload the latter. Telecom Italia Chairman Marco Tronchetti Provera resigned on Friday (15 September) after a week-long rift with Prime Minister Romano Prodi over the company's future strategy; the Italian incumbent’s supervisory board named Guido Rossi as its new chairman (see World: 12 September 2006: Uncertainty Trails Telecom Italia's Plan to Split Mobile and Fixed Units).