November 22, 2012 / 7:26 AM / 5 years ago

Telecom Italia at a strategy crossroads

* Italian fixed network spin-off, Brazil GVT deal on table

* Old focus on debt control, Italy cash to fund Latam growth

* New focus to be set in coming weeks, board meeting Dec. 6

* Capital increase with Sawiris could fund GVT deal

By Danilo Masoni

MILAN, Nov 22 (Reuters) - Telecom Italia faces key decisions in coming weeks on the future of its domestic business and its mobile business in Brazil, which could bring big changes to the debt-laden former national monopoly.

Its executive committee is meeting on Thursday to look at the issues, a source told Reuters, and the board will discuss them on Dec. 6.

First, it must decide whether to bid for French group Vivendi’s GVT, a broadband specialist in Brazil, to complement its TIM Participacoes mobile business there, a major source of growth in recent years.

To do so, chairman Franco Bernabe has to convince shareholders and the board - which include Telefonica, another Brazilian rival - the deal will deliver returns despite a potential 7 billion euro ($9.0 billion) price tag.

“The GVT option came out of the blue and management needs to provide more clarity,” a person close to the thinking of one of Telecom Italia’s core shareholders told Reuters.

Telecom Italia must also decide whether to continue working toward a separation of its domestic fixed-line network into a new access company which would roll out fibre throughout Italy and sell capacity on an equal basis to all players.

If it pursued this option, Telecom Italia would no longer be the sole owner of the fixed network since it is now in talks with the state-backed agency Cassa Depositi e Prestiti (CDP) to sell a minority stake in the new company. Analysts say the new company could be worth 9-15 billion euros.

“These are big strategic questions for the company and they are complex,” Nomura analyst James Britton said.

The views of Telecom Italia’s major shareholders, who are also on the board, remain to be seen.

Unlisted holding company Telco owns 22.4 percent of the Telecom Italia, with its shareholders Telefonica, insurer Assicurazioni Generali, and banks Mediobanca and Intesa Sanpaolo.

After a series of writedowns since the 2007 investment, all still have a book value on their Telecom Italia stakes of 1.50 euros per share, more than double its current 0.69 euro.

Waiting in the wings is Egyptian billionaire Naguib Sawiris who last Monday declared an interest in injecting billions of euros into Telecom Italia via a capital increase to “help fund growth projects”.

It is a rare cash-raising opportunity for a group squeezed for years between the need to pay dividends and keep its investment grade credit rating. The offer could prove unappealing to existing shareholders, including the Telco holding, since their stakes in Telecom Italia could be diluted.

Marco Patuano, Telecom Italia’s chief operating officer, said last week the group would have need for a capital increase, such as Sawiris had proposed, only if it wanted to bid for GVT.

“If we want to make a quantum jump in Brazil - because GVT is a big asset, an interesting asset with good managers - then the board must decide this,” he explained. “Once the strategy is decided, then the board will consider options to finance it, including Sawiris.”

Some investors and analysts welcome a share sale and the network spin-off as a way for Telecom Italia to get out from the weight of its debt and start to invest in future growth.

“A cash injection would actually be good for the company as it would take pressure off the balance sheet and could help them buy GVT to enhance their growth profile,” Nomura’s Britton said.

“But it would take a couple of years before Telecom Italia becomes capable of reasonable growth again.”

Analysts said acquiring GVT may prove overly ambitious given the price, and it was more likely the group would continue with a strategy of cutting costs to stave off credit agency downgrades, while pursuing the network spin-off in Italy.

Telecom Italia has made debt-cutting a priority since late 2008. It has trimmed net debt more than 4 billion euros to reach 29.5 billion at the end of September.

The network spin-off in Italy could raise several billion euros if the CDP agreed to take a minority stake in the new company. ($1 = 0.7801 euro) (Reporting by Danilo Masoni and Lisa Jucca; Editing by Leila Abboud)

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