T.Italia to assess Brazil, fixed-line options- sources

By Stefano Rebaudo

MILAN, Nov 27 (Reuters) - Telecom Italia (TLIT.MI) will discuss its business in Brazil, where its key investor Telefonica (TEF.MC) also operates, at a meeting next week but is unlikely to sell the unit, sources close to the talks said.

The Brazil unit, TIM Participacoes SA (TCSL4.SA) (TSU.N), has seen the highest growth for years in the group. In the third quarter it swung back to profit, helped by steady client base growth, after suffering earlier on from the financial crisis.

Italy's former telecoms monopoly will update investors on its plans at a Dec. 3 presentation in London after its board meets on Dec. 2. Chief Executive Officer Franco Bernabe is under pressure to prove he is turning the company around.

Telecom Italia shares have halved in value from a year ago partly over doubts related to its strategy. They are trading at around one euro, giving it a market value of some 18 billion euros.

Bernabe has also been given a Dec. 8 deadline by the telecoms regulator to outline how he will make the company's fixed-line network more open to competitors.

Bernabe has resisted calls for the fixed line network in Italy to be split from the parent and then to sell a minority stake. He has not taken a position on whether or not the company should consider selling the Brazilian unit.

However, shares rose on Wednesday on a report in Il Sole 24 Ore newspaper which said he might consider the split or a sale of the Brazil unit.

At the same time, talks with Libyan funds over making an investment in the operator seem at best stalled, after Bernabe ruled out for now a capital increase reserved for sovereign funds. Libya's envoy to Italy also has said the country only wants to invest in companies without debt problems.

From next week's meeting analysts are expecting more details on cost-cutting efforts at the operator, whose 37 billion euros ($47.73 billion) of debt are double its market value.

They are also looking for any plans to shed assets like the Brazil unit.

It will be discussed at a two-part board meeting but the unit remains core to the company, a source close to the matter said.

There have already been changes in the Brazil unit's management.

"The Brazil board meeting to be held in the morning has been scheduled for some time and was called to discuss Telecom's progress in that area after the weak results posted over the summer," the source said.

"Brazil remains core to the group, at least until there is a radical change in strategy, which is not expected right now."

PAPER LOSSES

Board members representing Spain's Telefonica, which has control with a group of Italian investors, will not take part in the discussion on Brazil. Telefonica has its own operations in Brazil and cannot attend because of antitrust regulations.

Other members of the Telco holding which controls Telecom Italia with a 24.5 percent stake are: Italian banks Intesa Sanpaolo (ISP.MI) and Mediobanca (MDBI.MI), insurer Generali (GASI.MI) and the Benetton family holding company Sintonia [SINFI.UL].

On paper, they have lost billions of euros on their investment since they bought control in April 2007. Some have said they will consider writing it down at the end of the year.

Investors face further pain as Bernabe slashed the dividend for 2007 in half, said future payouts would be closer to those of European peers and promised "no fireworks" under his tenure.

But third-quarter results beat expectations and the group stuck to its forecasts in a sign that Bernabe's belt-tightening strategy was paying off.

Credit Suisse analysts said the company needed to announce more cost-cutting plans to stabilise its domestic earnings, as it faces growing pressure on underlying margins.

Any efforts to cut debt will have to mainly come from asset sales or a rights issue, the analysts said.

"Weak capital markets have reduced the strategic options Telecom Italia has currently, and we therefore remain cautious ahead of next week," Credit Suisse said in a note to clients.

Bernabe has denied speculation he would tap investors for cash.

Deutsche Bank analysts said shedding the Brazil unit or the Italian fixed-line network were unrealistic in the short term.

(Writing by Deepa Babington; Editing by Sharon Lindores)