UPDATE 3-Telecom Italia may sell Telecom Argentina stake to Fintech

Fri Nov 8, 2013 10:35am EST

* Telecom Italia says gets $1 bln offer for T.Argentina stake

* U.S. fund in talks to buy controlling stake in T.Argentina

* Telecom Italia seeks to raise 4 bln euros via asset, bond sales

* Company aims to fix balance sheet, avoid more downgrades

* Fitch says steps not enough to significantly reduce debt

By Danilo Masoni and Alejandro Lifschitz

MILAN/BUENOS AIRES, Nov 8 (Reuters) - Telecom Italia may sell a controlling stake in Telecom Argentina to investment fund Fintech, as part of a new strategy aimed at raising 4 billion euros ($5.4 billion) to avoid a credit downgrade and revive its business.

Telecom Italia Chief Executive Marco Patuano, who has recently taken over from Franco Bernabe, unveiled a set of proposed disposals late on Thursday that includes the sale of 22.7 percent of Telecom Argentina.

Patuano said on Friday the company had received a $1 billion offer for its stake.

He did not name the bidder, but Fintech's Mexican owner David Martinez told Argentina's media regulator his U.S. based fund was in talks with the Italian company about the stake sale, a spokesman for the regulator told Reuters on Friday.

A further step in Telecom Italia's new plan was issuing a convertible bond for 1.3 billion euros ($1.7 billion).

The company is also planning to reap around 2 billion euros through the sale and lease-back of more than 17,000 towers in Italy and Brazil as well as the disposal of Telecom Italia's digital broadcasting business.

The plan does not envisage the sale of Telecom Italia's main Latin American asset, a majority stake in Brazilian mobile phone operator TIM Participacoes, which has been at the centre of speculation over asset sales in recent months.

Speaking at a news conference on the plan, Patuano said the offer for Telecom Argentina was "worth around $1 billion".

If a deal is struck, Fintech may have to sell its 40 percent stake in Cablevision, Argentina's biggest cable television company, as local regulations limit cross holdings between telecoms and media firms.

The spokesman said that Martinez had indicated he would be prepared to exit Cablevision.

At 1527 GMT, Telecom Italia shares were down 7 percent to 0.669 euros on the Milan stock exchange, while Telecom Argentina shares fell 1. percent to 36.4 pesos in Buenos Aires.

EARNINGS EROSION

The plan outlined on Thursday by Telecom Italia has the backing of Spanish rival Telefonica, which is also the largest shareholder in the Italian company.

Telefonica agreed in September to gradually take over the Italian group after striking a deal with Italian investors Mediobanca, Generali and Intesa Sanpaolo , with which it shares control of Telecom Italia.

Patuano said the measures would help his heavily indebted company to support investments in recession-hit Italy and in the growing Brazilian market while strengthening its balance sheet.

But credit rating agency Fitch said Telecom Italia must address earnings erosion at home to avoid being downgraded to 'junk' as planned asset sales and a mandatory convertible bond unveiled on Thursday are unlikely to help cut debt.

"The group's third-quarter results show that its domestic operations remain under significant pressure," Fitch said on Friday. "The company's ability to maintain its investment-grade rating therefore continues to depend on significantly slowing the rate of decline in EBITDA (core earnings) in 2014."

Telecom Italia's nine-month core profit was down 10.5 percent to 7.93 billion euros.

Fitch rates Telecom Italia's long-term rating at "BBB-", just one notch above non investment grade.

Telecom Italia was able to raise its full targeted amount of 1.3 billion euros through the 6.75-pct mandatory convertible bond, which will be redeemed in ordinary shares in 2016.

But Fitch, which sees considerable execution risks for the plan, said the bond would not qualify for equity credit and would not help Italy's biggest operator to cut its debt of nearly 29 billion debt.

Investors sold Telecom Italia shares to rebalance portfolios after buying into the convertible bond, traders said.

Analysts said Telecom Italia was forced to take some drastic new measures to try and address underperformance after being hit by a long recession and a price war in Italy. For more than a year Telecom Italia hesitated on which way to go, twice rebuffing approaches from non-European investors.

"The company has a revolver pointing at its head. They have to do it," a Milan-based fund manager said. "It's a step in the right direction." In the last three months, Telecom Italia's stock has risen 46 percent on talk there would be asset sales.

Patuano told analysts on Thursday he considered lucrative Brazilian unit TIM a core asset. But he added that the unit may be sold at a "convincing price".

A source familiar with the matter has said Telecom Italia wants at least 9 billion euros for its stake in TIM.

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