Italy's TIM, CDP eye preliminary deal on single network, sources say

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Telecom Italia new logo is seen at the headquarter in Rozzano neighbourhood of Milan, Italy, May 25, 2016. REUTERS/Stefano Rellandini

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MILAN, May 20 (Reuters) - Telecom Italia (TIM) (TLIT.MI) is eyeing a preliminary agreement with state lender CDP over a long-held plan to merge TIM's network assets with those of state-backed rival Open Fiber as early as next week, two sources said on Friday.

Under pressure for years in its hyper-competitive domestic market, debt-laden TIM last month started formal talks with CDP to revive a plan to create a single broadband network champion.

Negotiations came at a time when TIM CEO Pietro Labriola, who took the helm of the company in January, is working on a proposal to break up TIM's operations in a bid to unlock value and pursue M&A deals.

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Under such a plan, Labriola said the former phone monopoly was open to relinquishing control of its network infrastructure, seen as a way to ease a merger deal with Open Fiber.

As part of the overhaul, most of TIM's network assets would be carved out into a separate unit, called NetCo, which would take up a significant portion of the company's debt and domestic staff.

The sources said TIM and CDP are finalising a draft of a framework agreement which could be discussed at a Telecom Italia board meeting scheduled for May 26, cautioning the non-binding agreement could still be delayed.

Italy is keen to create a single network champion to avoid duplicating investments and speed up fibre optic roll across the country.

Treasury-controlled CDP, which is TIM second largest investor with a 10% stake and holds a 60% stake in Open Fiber, aims to get full control of the combined network entity, sources have previously said.

Infrastructure funds Macquarie and KKR (KKR.N), which hold minority stakes in Open Fiber and TIM's grid respectively, have also been involved in discussions as their support would be key for any plan to go through.

KKR, which spent 1.8 billion euro to buy a 37.5% stake in Telecom Italia's last mile network unit FiberCop and attempted a failed takeover approach for the whole of TIM, has expressed concerns over potential future regulatory and valuation issues related to the single network plan. read more

But a source familiar with the matter said the fund would not oppose the framework agreement.

(This story refiles to fix reference to Macquarie and KKR in paragraph 9)

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Reporting by Elvira Pollina Editing by Keith Weir

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