Telecom Italia Talks to Spin Off Network Are Hurt by Economy

Telecom Italia SpA’s talks to spin off its fixed-line network are running into difficulty and Fitch Ratings said today Italy’s weak economy will weigh on the phone company’s finances and debt ratings.

The negotiations continue and the Italy’s economic environment isn’t favorable for a conclusion, Chief Operating Officer Marco Patuano said at an event in Milan yesterday. Telecom Italia hired Morgan Stanley for advice on the spinoff and told the bank to lead talks with state lender Cassa Depositi e Prestiti SpA, which may acquire a stake in the network, a person familiar with the matter said in December.

Telecom Italia, the former Italian monopoly, is shedding assets and jobs as it looks for ways to reduce debt and raise money for investments. The fixed-line network is worth 13 billion euros ($16.9 billion) to 15 billion euros, according to Marco Fossati, whose family’s Findim Group SA is Telecom Italia’s second-biggest shareholder.

Italy’s largest phone company issued 750 million euros of hybrid bonds priced to yield 7.875 percent and maturing in 2073. The notes, which can be redeemed after five years, will carry a fixed coupon until 2018 and then reset to a variable rate every five years, said the person.

Fitch Cut

Fitch Ratings today confirmed Telecom Italia’s BBB rating, the second-lowest investment grade, with a negative outlook. Fitch last week cut Italy’s credit rating one level to BBB+ as an inconclusive election in February produced political paralysis that threatens the country’s ability to respond to a recession and the European debt crisis.

Telecom Italia shares rose 1.1 percent to 58.1 euro cents at 9:24 a.m. in Milan trading. The stock had declined 16 percent this year through yesterday.

Phone companies across Europe are fighting for more freedom from regulators to consolidate as they cope with declining voice revenue and contracting economies.

“Carriers won’t be able to create a single pan-European network because of the difficulty of sharing investments in different countries and deciding the allocation of capital expenditure,” Patuano said in an interview yesterday.

The European Telecommunications Network Operators’ Association, which represents 37 carriers, was preparing to ask the European Commission to allow more mergers within individual countries in exchange for their backing for the regulator’s push to develop a regional market, people familiar with the matter said last month.

Telecom Italia is among phone companies cutting jobs to lower costs. It agreed with unions yesterday that it won’t separate the call-center operations into a new company for one year in exchange for workers’ backing for 2,750 job cuts. Employees had been concerned that carving out the business may pave the way for a sale. Telefonica SA last year sold its Atento call-center division to Bain Capital Partners LLC.

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