UPDATE 2-Telecom Italia to sell Argentina unit, towers in new strategy
* New CEO aims to strengthen balance sheet
* Investment plan to upgrade networks in Italy, Brazil
* Launches convertible bond worth up to 1.3 bln euros
* CEO does not rule out Brazil sale but says is "core asset"
* Biggest shareholder Telefonica backs the moves
* No comment on dividend plans
By Danilo Masoni and Leila Abboud
MILAN/PARIS, Nov 7 (Reuters) - Telecom Italia will sell its Argentina unit and other assets while issuing a convertible bond, aiming to raise around 4 billion euros ($5.3 billion) to stave off a credit rating downgrade and strengthen operations in Italy and Brazil.
Italy's biggest telecoms operator, which is in the middle of a strategy shift under new Chief Executive Marco Patuano, said it had received an unsolicited offer for its 22.7 percent stake in Telecom Argentina and planned to sell.
It also plans to sell and lease back more than 17,000 mobile towers it owns in Italy and Brazil, and unload an Italian digital broadcasting unit, aiming to reap more than 2 billion euros from these deals.
The moves represent a major change for the debt-laden former Italian telecom monopoly and show the influence that its largest shareholder, Spain's Telefonica, is having after it agreed to raise its ownership of the holding company that owns 22.4 percent of Telecom Italia.
Patuano's new strategy, which has been backed by Telefonica, aims to chart a course out of Telecom Italia's high debts and deteriorating business in its home market by ploughing money into upgrading its creaky Italian network.
The asset sales could help stave off further credit downgrades. Moody's already cut Telecom Italia's rating to junk last month, while Fitch and Standard and Poors have it one notch above. Further downgrades will be costly because the company has to roll over large amounts of debt next year.
Moody's credit analyst Carlos Winzer said the agency would not count the convertible bond as equity until it converts to shares in 2016, so it would not help its rating for now.
"From our perspective as a rating agency, this is an immediately neutral move, and will be credit positive and strengthen the balance sheet only in year three when the bonds convert to equity."
EMPHASIS ON BRAZIL
The plan also puts a renewed emphasis on the group's Brazilian business, which sources have told Reuters that Telefonica is aiming to sell from the second half of 2014 onwards. TIM Brazil is the second-biggest mobile operator behind Telefonica's own Brazilian unit in the growing emerging market.
Patuano did not rule out a sale but said that Brazil was important to the group as shown by a new pledge to spend 11 billion reais ($4.78 billion) on network upgrades there between 2013 and 2016.
"Brazil is a core asset. You can never say never. There is a price for everything, but the price for a core asset must be a price that can convince me and the board to change the strategy we set today in which Brazil is an important component."
In Italy, the group also pledged to boost investment in high-speed fibre broadband and fourth-generation mobile technology. It will target around 9 billion euros in domestic capital expenditures from 2014 to 2016.
With the convertible bond of 1.3 billion euros, Telecom Italia avoided a straight capital increase, which sources earlier had told Reuters was an option. That may soothe shareholders because straight capital increases tend to be issued at a discount to the current share price, unlike the convertible bond.
Robin Bienenstock, analyst at Bernstein Research, said equity investors had been expecting a cash call of up to 2 billion euros, so the fact that Telecom Italia was undertaking asset sales and a convertible bond would likely be viewed positively.
"Since the mandatory convertible is at a premium to today's share price, it is arguably a better way to raise capital than a capital increase done at a discount," she said.
Telecom Italia declined to say anything about its dividend policy in the coming years.
Books for the November 2016 bond, convertible into ordinary and saving shares, will close by Friday, it said in a statement, adding that the coupon was expected to be of 5.75-6.5 percent. A source briefed on Thursday's meeting of the Telecom Italia board said Telefonica planned to take up its share.
In a separate statement, the company reiterated its financial targets for 2013, but added that "actual results may differ, even significantly, from those forecast for the whole 2013".
Telecom Italia said nine month revenues fell 7.6 percent to 20.38 billion euros, dragged lower by weakness in its recession-hit domestic business, while core profits fell 10.5 percent to 7.93 billion euros. Both were broadly in line with market expectations. Adjusted net debt stood at 28.23 billion euros at the end of September, also in line with analysts' expectations.
Telecom Italia shares closed down 4.3 percent at 0.72 euros before the announcements. They have risen 5.4 percent since January, underperforming the European telecom index, which is up nearly 30 percent.
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