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Italian energy group Snam considers Italgas spin-off

MILAN (Reuters) - Italian gas company Snam SRG.MI is looking to fund expansion of its core transmission business across Europe by spinning off domestic distribution operations worth more than 5 billion euros ($5.7 billion).

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Snam, controlled by state lender Cassa Depositi e Prestiti (CDP), said on Thursday that it is considering demerging all or part of Italgas, the country’s biggest gas distributor.

It gave no further details, but Snam CEO Carlo Malacarne dismissed suggestions that any merger talks with other players were currently under way.

“At the moment the focus is simply on the spin-off ... there are no pending negotiations with third parties,” Malacarne said in a conference call.

In January sources told Reuters that CDP was considering a merger of Italgas with nearest rival 2i Rete Gas to create a group with joint assets of more than 8 billion euros, though a deal could be undermined by antitrust problems.

Snam bought Italgas and gas storage business Stogit from oil major Eni ENI.MI in 2009 for a total 4.5 billion euros.

Italy’s gas distribution sector is highly fragmented, with more than 200 companies working across almost 7,000 concession areas serving more than 20 million clients. However, new rules will cut concession areas to only 177 and force bidders who win a tender in a new area to invest heavily.

“The idea for now is to list Italgas on a standalone basis as a pure distribution player, with Snam giving up control but hanging on to a stake,” a financial source with knowledge of the matter said.

TRANSMISSION EXPANSION

A research note from London-based Jefferies said that it valued Italgas at about 7.3 billion euros, representing a premium to the roughly 5.6 billion euro value of its regulated asset base (RAB).

Snam is investing heavily in expanding its European presence in gas transmission -- more than half of its revenue -- and could benefit from reducing its distribution commitments.

“Separation could have strong strategic value and benefits,” Malacarne said, adding that the industry is labor intensive in nature and requires continuous small-scale investment.

Controlled by CDP through a vehicle that also includes State Grid Corporation of China, Snam has a strategic alliance with Belgian peer Fluxys FLUX.BR and is keen to play its part in plans to transform Italy into a European gas hub.

It recently bought a 20 percent stake in the TAP pipeline that will bring Azeri gas to Italy and Snam Chief Operating Officer Marco Alvera said on Thursday that the group is monitoring the sale of a stake in OMV's OMVV.VI Gas Connect Austria.

Snam manages Italy’s high-pressure transport grid, which delivers gas to local distributors, who in turn supply retail clients.

Snam shares were up 2.9 percent by the close, against a 1.2 percent gain for the European utility index .SX6P.

Editing by Mark Heinrich and David Goodman

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