* T.Italia, Hutchinson say talks at initial stage
* Analysts value 3 Italia at 1.5-2 bln euros
* All-share deal likely route for a merger
* Telecom Italia shares up 1.6 pct (adds confirmation from Hutchinson, analysts, investor comments)
By Lisa Jucca and Stefano Rebaudo
MILAN, April 5 (Reuters) - Telecom Italia is in contact with Hong Kong-based Hutchison Whampoa over a possible tie-up with its Italian mobile phone business.
The move is the indebted Italian company’s latest attempt to revive its fortunes, with Chairman Franco Bernabe under pressure from investors to deliver higher returns and lift the share price from near all-time lows.
Meanwhile Hutchinson Whampoa’s 3 Italia, also known as H3G, is struggling to make a profit in Italy’s cut-throat mobile phone market.
The company said it would discuss the matter at a board meeting scheduled for April 11.
“The contacts are in such embryonic and preliminary state that the company cannot further comment,” Telecom Italia said in a statement, which was confirmed by Hutchinson Whampoa.
Telecom Italia shares jumped as investors welcomed the initiative, later paring gains to stand 1.6 percent higher at 0.59 euros at 1651 GMT.
Burdened by more than 28 billion euros ($36 billion) of debt, Telecom Italian is looking for a strategy to reverse falling margins in crisis-hit Italy and cooling growth in Brazil, where it owns mobile phone operator Tim Participacoes .
Bernabe’s plan to bring in a new investor last year failed when the group’s biggest shareholder Telco, which owns more than one fifth of the company, rejected a 3 billion euro cash injection from Egyptian magnate Naguib Sawiris.
An association of Telecom Italia retail investors owning around 0.5 percent said they wanted a deal to succeed this time. “We are going to oppose in all possible ways any veto or prejudice from the main shareholder (Telco),” the association said on Friday.
In the absence of new investment, the company has cut its dividend and turned to costly hybrid debt to fund much-needed upgrades to its ageing domestic network.
Analysts estimate 3 Italia could be worth between 1.5 billion euros and 2 billion euros.
Neither side gave any details of how a deal might be structured. Bankers speculated that Telecom Italia might take over 3 Italia, likely via an all-share transaction.
That would eliminate a domestic competitor for the Italian company and ease pressure on falling margins.
Analysts at broker Bernstein said Telecom Italia would be able to cut costs by putting most of 3 Italia’s customers onto its own network.
“For Telecom Italia the synergies would be large as much of the network would be redundant,” the analysts said in a note for clients.
They said possible interest in Telecom Italia from Chinese investors, which would push up its share price, could be a factor motivating Hutchison Whampoa.
“Perhaps the more interesting question is why would Hutchison take shares in Telecom Italia? We think that Telecom Italia could be an interesting target for Chinese investors,” they said, referring to China Mobile’s reported interest in making European investments.
But any deal would face regulatory and political hurdles.
The backing of owners of holding company Telco, which in turn controls around 22.4 percent of Telecom Italia, is also vital.
Telco is owned by Spanish telecoms operator Telefonica , the largest investor, insurer Generali and banks IntesaSanpaolo and Mediobanca.
Both Mediobanca and Generali are looking to get rid of their unprofitable Telecom Italia investment, several sources close to the situation have told Reuters. But they need to find a buyer willing to pay a high price to avoid booking hefty losses.
After repeated writedowns, Telco shareholders have booked Telecom Italia shares at 1.2 euros a share. This is more than twice the current market price of 0.57 euros per share. ($1 = 0.7780 euros) (Additional reporting by Danilo Masoni in Milan, Arno Schuetze in Frankfurt and Kwok Donny in Hong Kong; Editing by Erica Billingham)