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By: Moderatore on Venerdì 25 Aprile 2003 16:07
-------------25 APR 2003 11:38 Hugo Dixon
Markets to the rescue --------
Telecom Italia: The markets have come to Marco Tronchetti Provera's rescue. When the Italian businessman first unveiled his scheme to merge Olivetti and Telecom Italia, both of which he controls, it looked like about E3bn in value was being transferred to the Olivetti shareholders. Now it looks like the TI shareholders are being short-changed "only" to the tune of E500m.
These are, of course, just snapshots based on market prices. By the time of next month's general meetings to approve the deal, the value transfer could have widened again - or vanished completely.
The 39% rebound in the TI share price since last month's trough is largely a reflection of the broader rally in European telecoms stocks rather than any particular enthusiasm for Tronchetti's scheme. But it has had a powerful impact on the mathematics of the deal. This is because Olivetti, which consists of a chunk of TI shares and a mountain of debt, is a geared play on TI. In the same time that TI's stock has gone up 39%, Olivetti's net asset value has shot up 240%.
The effect of this is that an exchange ratio that looked grossly unfair last month, now only looks mildly unfair. TI shareholders are being offered seven new Olivetti shares for each existing share. On a net asset value basis - given current market prices - the fair ratio would be about 7.8.
And this is not all. Tronchetti's incredibly complicated scheme gives Olivetti shareholders the right to sell their stakes for cash at E1 each. At the time the deal was proposed, that looked a very rich price. Shareholders would have been mad not to take up the option. But the subsidy of Olivetti shareholders represented a big leakage of value from TI shareholders. At current prices, however, it is touch and go whether it makes sense for Olivetti shareholders to exercise their exit right. It is no longer a big deal.
So is that the end of the controversy then? Far from it. First, the deal still short-changes TI shareholders, if not by as much as it used to. Second, there's still a chance that share prices could collapse - increasing the value transfer.
Finally, there is a matter of principle. At the time the deal was put forward by Tronchetti it was extremely unfair. Tronchetti himself stood to gain from such a value transfer. What's more, he was able to foist the deal on minority shareholders because he controls both companies. All this is clearly a major breach of corporate governance best practice.
Shareholders should therefore continue to oppose the deal - unless either the terms are improved or the TI share price rebounds further.
