Telecom Italia Is Said to Back Ceding 10% to Hutchison

Telecom Italia SpA is in favor of letting Hutchison Whampoa Ltd. acquire no more than 10 percent of a combined carrier, a smaller stake than the Hong Kong company wants, according to a person familiar with the matter.

Hutchison’s 3 Italia has a so-called fair value of 1.5 billion euros ($2 billion) and Milan-based Telecom Italia is unlikely to accept a deal that would give billionaire Li Ka-shing’s Hutchison the 29.9 percent it sought, said the person, asking not to be identified because the deliberations are private. No decision has been made and Telecom Italia is open to negotiations, the person added.

Telecom Italia’s board last week asked Chairman Franco Bernabe to lead a panel to explore the feasibility of a business combination with Hutchison. An entry by Hutchison as shareholder could unravel a six-year pact at Telco SpA, whose investors Telefonica SA, Intesa Sanpaolo SpA, Assicurazioni Generali SpA and Mediobanca SpA together hold 22.4 percent of Italy’s former phone monopoly.

“The merger under study, if carried out at ratios which represent the actual contribution of the two companies properly, presents industrial synergies that involve cost savings” as well as “benefits from having two complementary customer bases,” Bernabe told shareholders at an annual meeting near Milan yesterday.

Merger Panel

Telecom Italia fell 0.5 percent to 59.2 cents in Milan at 10:02 a.m., giving it a market value of 11 billion euros. Hutchison dropped 1.4 percent to HK$79.65 on the Hong Kong exchange.

In a statement, Hutchison reiterated that “contacts between Telecom Italia SpA and 3 Italia SpA on possible business combinations are still very preliminary and of an exploratory nature. There is no agreement with respect to a possible transaction.”

While Bernabe said yesterday he is in favor of continuing discussions about a possible merger, he also said a decision is up to the panel, which includes Telefonica’s Julio Linares, Elio Cosimo Catania from Intesa Sanpaolo, Gabriele Galateri from Generali and independent director Luigi Zingales.

Intesa CEO Enrico Cucchiani said April 13 that the possibility of a Telecom Italia-3 Italia merger must be “examined carefully,” adding that it’s positive that international investors are interested in Italian businesses.

Debt Concern

A deal would combine Italy’s biggest wireless carrier with the No. 4. Telecom Italia said April 11 that Hutchison wants to become a leading shareholder in the carrier in any deal.

For Hutchison, Asia’s biggest investor in European wireless networks, Telecom Italia’s high net debt -- which reached 28.3 billion euros at the end of 2012 adjusted for some items -- is a concern, a person familiar with the matter has said.

“While a deal between Telecom Italia and H3G has a strong industrial logic in our view, control issues look intractable because we don’t believe Italy or Telefonica would want to give up ultimate control,” said Hannes Wittig, an analyst at JPMorgan Chase & Co. “At up to 10 percent, Hutchison’s exposure to the upside seems limited.”

It’s not the first time Bernabe held talks with Hutchison. In 2000, Hutchison bought a 51 percent stake in Andala SpA, which was founded and led by Bernabe, as its first step to build a mobile phone company in Italy that later became H3G, as 3 Italia is also known.

Spinoff plans

Then in 2010, Hutchison held discussions over a sale of its wireless business to Telecom Italia and the talks didn’t result in a deal because of differences in valuation, people with knowledge of the matter said at the time.

Telecom Italia plans to present to its board at a May 8 meeting a proposal to spin off the company’s fixed-line network, which is seen as a prerequisite to carry out any deal with Hutchison, another person said.

The plan envisages a two-step process, where Telecom Italia’s Open Access unit will be carved out into a separate business, followed by a spinoff of the access network and state lender Cassa Depositi e Prestiti SpA acquiring a stake after a new government is in place, the person said.

The network has a value of at least 13 billion euros, according to Findim Group, Telecom Italia’s second-largest shareholder.

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