* Network seen too strategic to fall into foreign hands
* Sale of network to govt could ease political opposition
* Hutchison interest may disappear if asset not included
* Deal faces core investors scepticism, regulatory hurdles
By Danilo Masoni
MILAN, April 16 If debt-laden Telecom Italia SpA
wants to agree a tie-up with Hutchison Whampoa Ltd
, it may first have to sell its strategic fixed-line
network to the state.
Franco Bernabe, chairman of Italy's former telecoms
monopoly, was tasked last week alongside four directors with
looking into a deal that would make the Hong Kong-based group
Telecom Italia's biggest shareholder.
Although the $4 billion plus tie-up has obvious attractions,
as it would create large cost-saving opportunities and ease
competition pressures at a time when recession is biting into
margins, it faces formidable obstacles.
Most immediately, it risks crashing against a wall of
political opposition to foreign ownership of a company deemed to
have strategic national significance.
Telecom Italia employs 54,000 people in Italy and is one of
the country's largest private-sector employers.
Its network, estimated to be worth between 12 billion euros
($15.7 billion) and 15 billion, is Italy's largest telecoms
infrastructure operator, linking millions of users from private
citizens to government agencies, banks and businesses.
And its stock market value of some 11.5 billion euros makes
it one of the country's 10 most valuable companies, just ahead
of truckmaker Fiat Industrial SpA, according to Reuters
The outgoing technocrat government of Mario Monti has
remained silent on the issue so far, but politicians and trade
unions have already voiced concerns.
"If Telecom ended up under the control of Hutchison, the key
issue would be the fate of the network and of its enormous data
asset base," Paolo Gentiloni, centre-left politician and former
communication minister, told Reuters.
"Keeping Telecom in Italian hands is not something to defend
at any cost, but access to the network has a strategic value
that must be safeguarded," Gentiloni added.
Even though the network needs costly upgrade investments, it
generates cash and helps Telecom Italia, burdened by more than
28 billion euros of debt, keep its leading market position.
Sources close to the talks have told Reuters that Hutchison,
owned by Asia's richest man Li Ka-shing, is targeting up to 29.9
percent of Telecom Italia and would merge its 3 Italia mobile
unit into Italy's dominant telecoms player.
Yet Rome holds special powers over the former
state-controlled company. Under the Telecom Italia's bylaws, it
can stop any unwanted buyer from having more than a 3 percent
stake or block deals that could harm the nation's interests.
Insiders say political backing is essential for a deal,
which also faces scepticism from a majority of investors in
Telco - the shell company which controls the company's board and
which is owned by Spain's Telefonica SA and a trio of
Italian financial institutions - as well as significant
Italian M&A lawyer Francesco Portolano said a transaction
would also raise the issue of reciprocity and whether Italian
capital could in turn be allowed to own national phone companies
A possible way out of the impasse could be carving out the
network and selling a significant minority stake in it to
state-backed fund Cassa Depositi e Presetiti (CDP).
Gentiloni said one possibility could even be that Telecom
Italia sell its entire stake in the network.
The group has already been in talks with CDP for months over
such a project, but discussions have stalled due to
disagreements over governance and the network's value.
People familiar with the situation have said CDP was looking
to take up a 30 stake in the network.
"The issue of the fixed-line network is a hurdle that can be
overcome. If it's strategic, it can be carved out," a senior
source close to a large shareholder told Reuters.
Uilcom union leader Salvo Ugliarolo said Rome needed to
quickly make up its mind if it wanted to retain the network.
"It's clear the network separation plan should be
accelerated if Hutchison becomes the main shareholder. It's
unthinkable that such a sensitive infrastructure, which carries
vital data for national security, is handed over to a foreign
company," Ugliarolo was quoted as saying by local media.
Yet any decision over the infrastructure may be put on hold
until Italy, without a government after inconclusive elections
in February, is able to solve its political gridlock.
It remains unclear whether the ambitions of Hutchison, which
has kept silent on the details of any prospective transaction,
embrace the network. Nomura analyst James Britton said in a note
its interest may evaporate if Telecom Italia's strongest asset
is not included in the deal.
Discussions over the possible tie-up come as Telecom Italia
shares trade at close to all-time lows and Bernabe comes under
pressure from investors to reverse falling domestic margins and
slowing growth in Brazil.
A cash-rich partner like Hutchison could help revive
prospects for the debt-laden operator, but some analysts believe
the deal is unlikely to happen. In which case, Telecom Italia's
need for a cash call could become more urgent, or the group
could be forced to consider the sale of its Brazilian unit TIM
Both options may look unappealing to the company's
($1 = 0.7643 euros)
(Additional reporting by Lisa Jucca; Editing by David Holmes)