Global Economics

Swisscom Gobbles Up Fastweb


The Italian service provider had great expectations and succeeded with a fiber-optic network that became irresistible to the Swiss telecom

Italy's most famous tech entrepreneur received an offer he couldn't refuse. On Mar. 12, Silvio Scaglia, the founder, president, and largest shareholder of Milan-based Internet service provider Fastweb, accepted a $4.88 billion (€3.7 billion) takeover bid from Switzerland's state-controlled telecom operator, Swisscom (SCM).

With 22,000 kilometers of fiber optic networks and more than one million customers, Fastweb is Italy's second-largest fixed-line phone operator and a leader in broadband and entertainment services. Though still dwarfed by former state-owned monopoly Telecom Italia (TI), Fastweb has proven that aggressive, well-funded startups can make a dent in entrenched European incumbents, especially in the emerging world of "triple-play" services that combine phone, Internet, and digital TV.

Scaglia founded the company seven-and-a-half years ago with the audacious goal of wiring Italy from tip to toe with fiber optics, at a cost of $6 billion. The company's initial public offering (IPO) in 2000, which valued Fastweb (then known as e.Biscom) at $7.3 billion, was the largest, to date, of a non-state-owned company.

Stymied Cross-Border Efforts

After the dot-com bust—during which Fastweb's market capitalization fell to $1.4 billion—Scaglia had to scale back his plans, shifting his emphasis to providing lower-cost digital subscriber line (DSL) broadband. Fastweb has never posted a profit, and lost €123.6 million ($163 million) in 2006. It was expecting to break even this year.

Despite the setbacks, Scaglia continued laying fiber, and now has a network that passes through 45% of Italian homes. That was an irresistible draw for Swisscom, which has so far been stymied in its efforts to expand much beyond the borders of Switzerland. The company is offering €47 ($61.96) per share for Fastweb, for a total bid of €3.7 billion ($4.88 billion), some 12% more than the closing share price of €42.3 last Friday, Mar. 9.

"Italy hasn't got a cable network, so the fact that Fastweb can offer a triple play of phone, video, and broadband on its fiber-optic network gives it a unique market position," says Ian Cox, principal analyst at researcher TelecomView in England. Cox argues that European telcos must look beyond their borders for growth.

"A Tasty Morsel"

Scaglia, 48, who still owns 18.75% of Fastweb, has committed to sell to Swisscom—unless someone else comes by with a higher offer. Both Britain's Vodafone (VOD) and Italy's Mediaset, controlled by former Prime Minister Silvio Berlusconi, have been mentioned as potential rival bidders, but analysts see both as unlikely to supplant the Swiss telco.

"Fastweb is a tasty morsel," says Luigi Pugliese, partner and vice-president at Booz Allen Hamilton in Milan. "Though anything can happen, I think it would be difficult for another group to come forward with that kind of cash at their disposal and make such an attractive offer."

The deal also marks a return to the mergers-and-acquisitions game by one of the world's most successful telcos. Formed in the early 1990s after a split from the telecom-postal group Telecom PTT, Swisscom has been innovative at home, but stumbled over acquisition attempts. In late 2005, the Swiss state, which owns 54.8% of the company, shot down its plan to buy up the former Irish telecom monopoly Eircom Group, concerned that the foreign acquisition would jeopardize a plan to privatize Swisscom. That plan later collapsed, but not before then-Swisscom Chief Executive Officer Jens Alder had resigned in protest over the state's interference with the aborted Eircom deal.

Treading Carefully

Now, the trends buffeting other old-line telcos are prompting new thinking at the Swiss company. Since 1998, its fixed-line operations have steadily lost market share among Switzerland's 7.5 million inhabitants. One way to kickstart growth is via triple-play—and also the "quad-play" variant that also includes wireless services. Last December, Swisscom reasserted control over its mobile unit by buying back the 25% of its shares owned by Vodafone for $3.4 billion.

The next step is the far grander plan to enter Italy via Fastweb. But after its past foreign disappointments, Swisscom is treading carefully this time. Chief Executive Carsten Schloter made sure that the federal government in Berne gave a preemptive green light on the deal.

Scaglia's Many Ambitions

Italy provides plenty of market potential. Only about a third of its households have broadband Net connections, well below the almost 50% rates in England and France. And while Fastweb so far has won slightly less than 15% of the broadband market, well behind Telecom Italia's 80% share, analysts see room for growth. Swisscom figures that by 2009 the Fastweb acquisition should boost sales by as much as 20% and lift earnings per share. "Swisscom has been looking around for a while for new investments," says Pugliese. "They have the cash and this is part of a global strategy of strategic mergers in the telecoms industry."

And what will become of Italy's poster boy of entrepreneurialism? Scaglia says he will stay on Fastweb's board if Swisscom asks him to. But he has other irons in the fire, including an ambitious TV-via-Internet and video-on-demand project called Babelgum. Scaglia has reportedly put $13 million of his own money into Babelgum, which is slated to go into preliminary tests at the end of this month.

Will it be another winner? Time will tell, but Scaglia has already proven himself ahead of the curve many times over, so it's a good bet we'll be hearing from him again.

Courtney Walsh writes for BusinessWeek.com from Rome.

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