Telecom Italia faces network sale to overcome Hutchison hurdle

Tue Apr 16, 2013 8:12am EDT

* Network seen too strategic to fall into foreign hands

* Sale of network to govt could ease political opposition

* Hutchison interest may disappear if asset not included

* Deal faces core investors scepticism, regulatory hurdles

By Danilo Masoni

MILAN, April 16 (Reuters) - If debt-laden Telecom Italia SpA wants to agree a tie-up with Hutchison Whampoa Ltd , it may first have to sell its strategic fixed-line network to the state.

Franco Bernabe, chairman of Italy's former telecoms monopoly, was tasked last week alongside four directors with looking into a deal that would make the Hong Kong-based group Telecom Italia's biggest shareholder.

Although the $4 billion plus tie-up has obvious attractions, as it would create large cost-saving opportunities and ease competition pressures at a time when recession is biting into margins, it faces formidable obstacles.

Most immediately, it risks crashing against a wall of political opposition to foreign ownership of a company deemed to have strategic national significance.

Telecom Italia employs 54,000 people in Italy and is one of the country's largest private-sector employers.

Its network, estimated to be worth between 12 billion euros ($15.7 billion) and 15 billion, is Italy's largest telecoms infrastructure operator, linking millions of users from private citizens to government agencies, banks and businesses.

And its stock market value of some 11.5 billion euros makes it one of the country's 10 most valuable companies, just ahead of truckmaker Fiat Industrial SpA, according to Reuters data.

The outgoing technocrat government of Mario Monti has remained silent on the issue so far, but politicians and trade unions have already voiced concerns.

"If Telecom ended up under the control of Hutchison, the key issue would be the fate of the network and of its enormous data asset base," Paolo Gentiloni, centre-left politician and former communication minister, told Reuters.

"Keeping Telecom in Italian hands is not something to defend at any cost, but access to the network has a strategic value that must be safeguarded," Gentiloni added.

Even though the network needs costly upgrade investments, it generates cash and helps Telecom Italia, burdened by more than 28 billion euros of debt, keep its leading market position.

SPECIAL POWERS

Sources close to the talks have told Reuters that Hutchison, owned by Asia's richest man Li Ka-shing, is targeting up to 29.9 percent of Telecom Italia and would merge its 3 Italia mobile unit into Italy's dominant telecoms player.

Yet Rome holds special powers over the former state-controlled company. Under the Telecom Italia's bylaws, it can stop any unwanted buyer from having more than a 3 percent stake or block deals that could harm the nation's interests.

Insiders say political backing is essential for a deal, which also faces scepticism from a majority of investors in Telco - the shell company which controls the company's board and which is owned by Spain's Telefonica SA and a trio of Italian financial institutions - as well as significant antitrust hurdles.

Italian M&A lawyer Francesco Portolano said a transaction would also raise the issue of reciprocity and whether Italian capital could in turn be allowed to own national phone companies in China.

A possible way out of the impasse could be carving out the network and selling a significant minority stake in it to state-backed fund Cassa Depositi e Presetiti (CDP).

Gentiloni said one possibility could even be that Telecom Italia sell its entire stake in the network.

The group has already been in talks with CDP for months over such a project, but discussions have stalled due to disagreements over governance and the network's value.

CARVE-OUT

People familiar with the situation have said CDP was looking to take up a 30 stake in the network.

"The issue of the fixed-line network is a hurdle that can be overcome. If it's strategic, it can be carved out," a senior source close to a large shareholder told Reuters.

Uilcom union leader Salvo Ugliarolo said Rome needed to quickly make up its mind if it wanted to retain the network.

"It's clear the network separation plan should be accelerated if Hutchison becomes the main shareholder. It's unthinkable that such a sensitive infrastructure, which carries vital data for national security, is handed over to a foreign company," Ugliarolo was quoted as saying by local media.

Yet any decision over the infrastructure may be put on hold until Italy, without a government after inconclusive elections in February, is able to solve its political gridlock.

It remains unclear whether the ambitions of Hutchison, which has kept silent on the details of any prospective transaction, embrace the network. Nomura analyst James Britton said in a note its interest may evaporate if Telecom Italia's strongest asset is not included in the deal.

Discussions over the possible tie-up come as Telecom Italia shares trade at close to all-time lows and Bernabe comes under pressure from investors to reverse falling domestic margins and slowing growth in Brazil.

A cash-rich partner like Hutchison could help revive prospects for the debt-laden operator, but some analysts believe the deal is unlikely to happen. In which case, Telecom Italia's need for a cash call could become more urgent, or the group could be forced to consider the sale of its Brazilian unit TIM .

Both options may look unappealing to the company's long-suffering investors. ($1 = 0.7643 euros) (Additional reporting by Lisa Jucca; Editing by David Holmes)

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