UPDATE 2-Debt target points Telecom Italia toward asset sales, cost cuts

Fri Nov 9, 2012 8:58am EST

* Sees net debt cut by 2 bln euro to 27.5 bln by yr-end

* Eyes on possible network spin-off, sale of media arm

* Nine-month EBITDA falls 3 percent, matching expectations

* Says cash flow more than enough to meet div, tax needs

* Shares up 3.2 percent

By Danilo Masoni

MILAN, Nov 9 (Reuters) - Telecom Italia stuck to its targets for cuts in debt on Friday and said it was pushing ahead with the sale of its media arm in a bid to make up for poor operating revenues.

Facing pressure on sales and margins due to Italy's plummet into recession, company managers promised Telecom Italia would lay out a plan for more aggressive cuts in costs at the beginning of next year.

Shares in Italy's biggest telecoms operator rose as much as 4 percent after it reiterated its guidance on debt and 2012 profits. Its nine-month results showed a decline that was broadly expected.

Chairman Franco Bernabe said healthy cashflow had more than offset tax and dividend payout requirements, allowing it to affirm a year-end adjusted net debt goal of 27.5 billion euros ($35 billion). Net debt was at 29.5 billion euros end-September.

"Net proceeds from the sale of Matrix and Telecom Italia Media will bridge the gap to reach our (2012) net debt target," Bernabe said in a conference call.

In August, Telecom Italia agreed to sell its Matrix web unit in a 88 million euro deal.

Squeezed by weak economies, regulatory pressures and structural changes, other European telecoms like France Telecom and Telefonica have cut dividends this year.

After the nine-month results were released, some analysts speculated that the Italian company is likely to have to dispose of more assets.

Managers said they hoped to have binding offers for the already underway sale of broadcasting arm Telecom Italia Media in the first week of December and would also take a decision on a possible spin-off of its fixed-line network around that time.

The company's core earnings fell 3 percent to 8.86 billion euros in the first three quarters of this year, as growth in its second-largest market Brazil slowed and was not enough to offset the sluggish domestic trend.

TIM Participacoes, the Brazilian affiliate of Telecom Italia, posted flat quarterly profits in October, as a rise in subscribers helped make up for a slowdown in sales and costs linked to growing regulatory pressure.

Revenues from its higher-margin Italian operations fell 4.7 percent to 13.4 billion euros, as a cut in mobile termination rates added pressure, while total revenues were unchanged at 22.06 billion euros.

COSTLY

Analysts say Telecom Italia needs to cut back on a high debt burden left over from a highly leveraged takeover in 1999, particularly given the grim outlook for an Italian economy facing a decade of stringent public sector budget cuts.

The company had planned to sell its cash-burning television arm by year-end, but the disposal is complicated by uncertain sector prospects.

The sale of a minority stake in its fixed line network to state-owned fund Cassa Depositi e Prestiti (CDP) could help cut debt and boost broadband investment.

"In truth there is not really a decision to be made. Telecom Italia needs a deal," Bernstein analyst Robin Bienenstock said.

He said Telecom Italia needed a significant investment in its network to avoid mobile cannibalising wireline but help from the CDP was necessary to do so.

According to another analyst, Telecom Italia will have to complete the sale of Telecom Italia Media to help achieve its year-end deleveraging target.

In the statement, Bernabe said the group's priorities remained protecting profit, slashing debt and pursuing revenue growth.

Shares in Telecom Italia led Milan blue chips higher and, by 1125 GMT, were up 3.2 percent at 0.6880 euro.

"The group had guided down before, third-quarter results were good, fuelling short covering," a Milan trader said.

The stock is down nearly 20 percent this year, better than Telefonica's 24 percent decline and France Telecom's 32 percent drop, but worse than Vodafone and Deutsche Telekom , which fell around 5 percent.

The Europe Stock 600 Telecom index is down 8.7 pct year to date.

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