FRANKFURT/MILAN (Reuters) - Hong Kong's Hutchison Whampoa 0013.HK is in talks to buy up to 29.9 percent of Telecom Italia (TLIT.MI) in a deal that would radically alter the power base at Italy's leading phone company, two sources familiar with the negotiations said.
Hutchison is looking at buying out three Italian investors in Telco, which controls Telecom Italia through a 22.4 percent stake - which have lost three quarters of their investment since buying in at more than 2 euros a share in 2007 - and could pay about double the current market price for their stakes.
That would make Hutchison the largest shareholder in debt-laden Telecom Italia, whose shares have been languishing near historic lows due to falling margins in Italy and a cooling in its other main market, Brazil, where it competes with Spain's Telefonica (TEF.MC), the biggest investor in Telco.
Hutchison would also have to win over the Italian treasury, which has veto powers over takeover deals.
Under the plan outlined in a memorandum of understanding presented to Chairman Franco Bernabe, Hutchison would transfer its local mobile business 3 Italia, which analysts value at 1.5-2 billion euros, to Telecom Italia in exchange for shares.
This would cut the number of Italy's mobile phone operators from four to three, possibly leading to antitrust conditions since the new group would control 46 percent of this market.
In addition, Hutchison is offering to buy the combined 12.1 percent owned through Telco by insurer Generali (GASI.MI) and banks Mediobanca (MDBI.MI) and Intesa Sanpaolo (ISP.MI), at a price that could be close to a book value of 1.2 euros a share.
"This is on the radar of the involved parties and will be discussed at an April 11 board meeting. But such a deal will not be struck in a week, so do not expect any decisions from that meeting," said one of the two sources. "From embryonic talks to a fully negotiated deal, that takes months."
The cashflow-rich company accumulated its debt burden in 1999 after a leveraged buyout by businessman Roberto Colaninno, who only two years later handed over control to a group of investors led by Pirelli head Marco Tronchetti Provera.
After posting a 2012 net loss of 1.6 billion euros due to goodwill writedowns, it was forced to cut its dividend and turn to costly hybrid securities to fund upgrades of its ageing domestic network and cut debt of more than 28 billion euros.
Hutchison may also buy shares held by other investors, one of the sources said, adding it was unclear whether Spain's Telefonica (TEF.MC) wants to sell its effective 10.3 percent stake.
Under the Telco statute, which could be unwound in August 2014, Telefonica has a right of first refusal over Telecom Italia shares. But if Telefonica were to tighten its grip over the Italian group, this may raise antitrust problems in Brazil.
Telefonica paid 2 billion euros for its stake in Telecom Italia in 2007 in a move aimed at fending off an attempt by Mexican rival Carlos Slim, head of America Movil, to buy the former Italian telecoms monopoly. The move was a meant to be prelude to a full merger with Telecom Italia, but that never materialized, two sources said.
"Market conditions have profoundly changed since Telefonica invested in Telecom Italia in 2007. It does not make any sense for Telefonica to continue to invest in the Italian operator. But they are not going to exit by simply selling to the Chinese," said a source close to Telco.
IntesaSanpaolo was not immediately available for comment, while Mediobanca, Generali and Telefonica declined to comment. Telecom Italia and Hutchison repeated on Tuesday that contacts were preliminary. The Italian group added the issue would be discussed at a Telecom Italia board meeting on Thursday.
Shares in Telecom Italia, worth around 10 billion euros on the market, were up 4 percent at 0.597 euros: "If they get an offer at 1.2 euros/share, we believe Telefonica and its partners in Telco would sell," said Mirabaud analyst Javier Mielgo.
Sources close to Telco said its shareholders had not been informed, either formally or informally, of the bid details.
"The price, if confirmed, is interesting as it pays a premium. But this cannot be the only criteria for a decision to sell," said one of the sources.
Italian shareholders in Telco are looking to offload their Telecom Italia shares, which have forced them to make multiple writedowns as they continued to fall in value.
However, they are keen to make sure that any new buyer has a business plan that won't result in losses of jobs in core market Italy, where a deep recession has sent youth unemployment to record highs.
Last year they turned down a 3-billion-euro cash injection by Egyptian tycoon Naguib Sawiris at 0.7 euros a share.
"Minority investors have not benefited from the various ownership changes that happened in the last few years. (A deal with Hutchison) could be to some extent more exciting for Telco," said RMJ fund manager Alesssandro Frigerio.
Writing by Lisa Jucca in Milan, additional reporting by Donny Kwok in Hong Kong and Robert Hetz in Madrid; Editing by David Stamp and Will Waterman