Telecom Italia directors and politicians challenge Telefónica's plans

Telefónica's plan to increase its hold over Telecom Italia has already encountered a hurdle after directors of the Italian incumbent as well as Italian politicians voiced concerns that the Spanish operator would seek to sell valuable assets of Telecom Italia once it had gained control, Reuters reported.

On Tuesday, Telefónica finally secured an €860 million ($1.2 billion) cash and shares deal that will see the Spanish operator increase its hold over the Italian incumbent via the Telco holding company, secure control of Telecom Italia's Brazilian unit without having to launch a takeover bid, and also allow core Italian shareholders to gradually bow out. This follows months of uncertainty about the future ownership structure of Telecom Italia.

Telefónica said it would raise its stake in Telco, the largest shareholder in Telecom Italia, to 70 per cent from 46 percent over the next few months. Telco owns 22.4 per cent of Telecom Italia.

The Financial Times added that the Italian shareholders, who have already written down the value of their stakes, have two opportunities to withdraw from Telco in June 2014 and February 2015.

On Wednesday, Telecom Italia CEO Franco Bernabe told an Italian senate that the Italian operator needs to reduce its €29 billion ($39 billion) of debt to prevent its credit rating being cut to junk, according to Reuters, and said the best way to do this would be to raise money from investors. This could cause a clash between Telecom Italia and Telefónica, which is believed to support asset sales rather than a capital increase.

A sale of all or parts of Telecom Italia's unit in Brazil, TIM Participacoes, which competes directly with Telefónica in the South American country, or of its Telecom Argentina unit could be options to raise cash, analysts told Reuters.

However, five Telecom Italia directors have spoken out against this move, and Italian politicians and trade unions called on the left-right coalition government of Prime Minister Enrico Letta to intervene, Reuters said.

"This is the case of Telefónica, a direct competitor of Telecom Italia in Argentina and Brazil, which risks forcing Telecom Italia to sell assets that are precious for its relaunch," board member Luigi Zingales said on Wednesday, according to Reuters.

Quoting unnamed sources close to the situation, the Financial Times said the Telco deal struck by Telefónica on Tuesday would give it more power to force management to sell the Italian group's profitable operations in Brazil to help cut its debt.

Robin Bienenstock, analyst at Bernstein, told the FT that the deal left Telefónica "in a position to create a consortiums bid" for the Brazilian business. She pointed to a potential joint bid by Telefónica with Portugal Telecom and América Móvil, the Mexican telecoms group controlled by Carlos Slim.

"We believe this additional investment made by Telefónica in Telco was the price the company was willing to pay to keep its options open at Telecom Italia and keep at large any other third party that could be interested in Telecom Italia and especially its Brazilian assets," Espirito Santo analysts told Reuters.

Reuters said analysts have estimated the Brazilian operations to be worth around €7.4 billion ($10 billion). Bernabe is due to present a business plan for Telecom Italia on Oct. 3.

For more:
- see this Reuters article
- see this separate Reuters article
- see this FT article (sub. req.)
- see this Bloomberg article
- see this separate Bloomberg article
- see this WSJ article (sub. req.)

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