CD&R, Cisco in Italian Telecom Deal –

Clayton, Dubilier & Rice is joining the world’s most valuable company, Cisco Systems Inc., in acquiring the switching-equipment business of Telecom Italia SpA for approximately $1 billion, said a source familiar with the deal.

Should the deal close, New York buyout veteran Clayton Dubilier will receive a 51% stake in the new company, called Italtel. Networking giant Cisco will own 19%, and Telecom Italia will retain a 20% stake. Joining Clayton Dubilier in the deal are U.S. private equity houses Brera Capital and Advent International, which will receive small stakes in the company.

The deal will be structured with approximately 50% debt, most of that assumed.

Cisco, which recently surpassed Microsoft Corp. to become world’s largest company in terms of market capitalization, initiated the deal with Telecom Italia – a major Cisco customer. Cisco subsequently decided to bring in financial buyers on the transaction. Merrill Lynch & Co. and Goldman Sachs & Co., which advise Cisco and Telecom Italia, respectively, arranged a “beauty contest” by which various financial sponsors were reviewed for participation in the deal.

Italtel manufactures products that direct telecommunications traffic, and is developing software that will allow voice calls over the Internet. However, the vast majority of Italtel’s business is with its parent company, the source said, and Cisco wants to establish an independent business that will compete and do business with telecommunications companies throughout Southern Europe.

The source said owning Italtel will give the Clayton Dubilier-led group a valuable vantage point from which to observe trends in the telecommunications market in Southern Europe.

A spokesperson for Clayton Dubilier would not confirm or deny reports of the deal.

Clayton Dubilier has been increasingly active in the European market. In December, the firm made its largest investment ever with the acquisition of German jet maker Fairchild Aerospace Corp. – a deal valued at $1.2 billion (BUYOUTS Jan. 10, p. 1). In September, it acquired U.K. moving services company Allied Van Lines (BUYOUTS Sept. 27, 1999, p. 4).

Clayton Dubilier is currently investing its sixth fund, which closed last year on $3.5 billion.

In other news, Clayton Dubilier recently named George Tamke as the firm’s 17th principal. Tamke is the former vice chairman and co-chief executive of Emerson Electric Co.