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MILAN, April 5 (Reuters) - The board of Telecom Italia is expected to discuss a possible tie-up with Hutchison Whampoa's Italian business next week, sources with direct knowledge of the situation said, in new attempt to revive the company.
Chairman Franco Bernabe is under pressure from shareholders to deliver higher returns that could lift the indebted company's share price from just above all-time lows.
His plan to bring in a new investor last year failed when the company's biggest shareholder rejected a proposed 3 billion euro cash injection from Egyptian magnate Naguib Sawiris.
Any new proposal involving Hong Kong-based Hutchison Whampoa's loss-making Italian unit HG3 is expected to be informal at this stage, the sources said.
"It's likely that the issue will be discussed at the board meeting of April 11," one source with direct knowledge of the situation told Reuters.
"However, there is no formal offer from H3G and any integration plan is to be considered as a defensive move from Bernabe, who risks seeing his mandate revoked, most likely when his term ends in the spring of next year."
Telecom Italia and Hutchinson Whampoa, owned by businessman Li Ka-Shing, declined to comment.
Telecom Italian, burdened by more than 28 billion euros of debt, 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.
The Italian company has cut its dividend and turned to costly hybrid debt to fund much-needed investments to upgrade its ageing domestic network.
Shares rallied nearly 10 percent late on Thursday on reports of a possible merger between Telecom Italia and the loss-making HG3 with analysts saying it would make strong industrial and financial sense for both parties. They were down 1.4 percent at 1132 GMT on Friday.
"Hutchison is willing to talk and both sides are trying to work together. But the question will be if an agreement could be reached on the valuation," said one source familiar with the situation, who said a valuation of 1.5-2 billion euros for H3G was realistic.
Incorporating H3G into Telecom Italia, likely to be an all-share deal, would eliminate a domestic competitor and ease pressure on falling margins. However, it would also likely raise antitrust concerns.
The backing of a group of shareholders that own holding Telco, which in turn controls around 22.4 percent of Telecom Italia, is critical.
Telco is owned by Spanish telecoms operator Telefonica , the largest investor, and Italian financial services groups Generali, 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 that have weighed on results, 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. At the end of last year, Sawiris' offered was worth 0.7 euros a share.
"These shareholders could sell, but they need to find a buyer. Otherwise, at current market prices, they risk being hit by a significant loss," said one of the sources. (Writing by Lisa Jucca, Additional reporting by Arno Schuetze in Frankfurt and Kwok Donny in Hong Kong; Editing by Erica Billingham)