By Stefano Rebaudo and Lisa Jucca
MILAN (Reuters) - Telecom Italia's board
Telecom chairman Franco Bernabe, under pressure to improve margins at the debt-laden phone company, hopes for initial backing for the plan; sources close to the talks say it would see Hutchison buy a 12-percent stake now held by three Italian investors and merge its Italian mobile phone unit 3 Italia with Telecom in exchange for about a further 18 percent in the group.
"It will be a long board meeting," board member Tarak Ben Ammar said as he entered the Telecom Italia head office in Milan. "There are a lot of issues on the agenda."
Sources familiar with the situation told Reuters that Bernabe was likely to win permission from the board to expand talks beyond the preliminary stage. They could last for months.
A group of investors - Spanish telecoms group Telefonica and three Italian financial institutions - control the board through a vehicle known as Telco and have yet to take a public stance on the plan, which they had not seen in detail before Thursday.
One source familiar with the thinking of the Telco shareholders told Reuters that, in its current form, the plan did not seem entirely convincing, but that it would be fair to give Bernabe a mandate to explore the options with Hutchison.
The source said one problem could be whether Telefonica and Hutchison could both remain involved: "There is no place for two industrial partners in Telecom Italia," the source said.
However, a second source said it would be "irresponsible" to completely turn down the plan - if it made industrial sense and offered good financial returns.
Italian newspaper Il Messaggero said on Thursday that Bernabe and representatives from Hutchison had already signed a non-binding, confidentiality agreement to continue discussions.
Telecom Italia and Hutchison were not immediately available for comment. Telco said in a statement this week its investors had had no contact with either Hutchison or Telecom Italia.
Telco is 46.2-percent owned by Telefonica
Shares in Telecom Italia were up 2.66 percent at 0.6180 euros at 5:00 a.m. ET, outperforming the Italian stock market.
HURDLES
The deal could meet with political opposition in Italy given the strategic importance of Telecom Italia's fixed-line network. The government has a golden share in the former state monopoly, giving it the right to veto some board decisions.
Board member Ben Ammar said he could not say whether a tie-up might exclude Telecom Italia's fixed-line network.
A deal could also face regulatory hurdles, as in the case of a recent merger deal in the mobile phone market in Austria.
The deal is expected to offer cost savings estimated at 500 million euros and improve margins as it would reduce to three from four the number of players in Italy's mobile phone segment.
Analysts value 3 Italia at up to 2 billion euros, equivalent to six times estimated 2013 group core earnings (EBITDA).
According to the sources, Hutchison could be prepared to buy out the Italian investors in Telco at a price not far from a book value of 1.2 euros per share.
The high book value, twice the market price, has so far prevented any tie-up between Telecom Italia and another player as shareholders have been unwilling to swallow big losses.
"While we see potential for significant synergies from such an operation, we believe there are several obstacles that could prevent the merger to take place," analysts at Espirito Santo said in a note to clients.
Last year, Telco investors turned down a 3-billion-euro cash offer from Egyptian telecoms tycoon Naguib Sawiris that would have valued their shares at 0.7 euros each.
($1 = 0.7658 euros)
(Additional reporting by Danilo Masoni in Milan and Robert Hetz in Madrid; Editing by Jason Neely and Alastair Macdonald)
Source: http://news.yahoo.com/telecom-italia-board-weighs-hutchison-plan-092632449--sector.html
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