Telecom Italia said it has held preliminary contacts with Hutchison Whampoa to study a possible merger with its 3 Italia unit, also known as H3G.
"The contacts are in such embryonic and preliminary state that the company cannot further comment on the news," Telecom Italia said, according to Reuters, adding that the matter will be discussed at a board meeting scheduled for April 11.
However, local reports claim that a deal could see H3G merged into Telecom Italia Mobile (TIM) in return for Hutchison Whampoa receiving a 5 per cent holding in Telecom Italia, according to Dow Jones Newswires.
Hutchison Whampoa is said to have hired Goldman Sachs to help examine the possibility of merger.
Such a move would consolidate two of the current four larger mobile operators in Italy, with TIM's market share at almost 35 per cent and H3G at over 10 per cent, leaving Wind and Vodafone Italy as its only serious rivals.
"However, there is no formal offer from H3G and any integration plan is to be considered as a defensive move from [Telecom Italia CEO Franco] Bernabe, who risks seeing his mandate revoked, most likely when his term ends in the spring of next year," one source with direct knowledge of the situation told Reuters.
telecom Italia's share rallied nearly 10 per cent Thursday after Italian media indicated a merger was possible, with analysts commenting that it makes strong industrial and financial sense for both parties.
"Hutchison is willing to talk and both sides are trying to work together. But the question will be if an agreement could be reached on the valuation," a source familiar with the situation told Reuters, who said a valuation of €1.5 to €2 billion for H3G was realistic.
Merging with H3G would allow TIM to eliminate a domestic competitor and ease pressure on falling margins, however, it would also likely raise antitrust concerns, according to Reuters.
Telecom Italia aims to win LTE launch race, but Vodaofone may spoil party
Telecom Italia, Vodafone and Wind caught in Italian antitrust probe
European LTE to move forward with UK, Italy launches
Vodafone Italia mulls investment in Metroweb fibre network