MILAN (Reuters) - Shares in Telecom Italia (TLIT.MI) rose on Wednesday after Italian and French leaders said they wanted to create major companies that can compete in Europe, fuelling market talk of possible combinations in the telecoms sector.
French President Francois Hollande said on Tuesday there could be cooperation between France and Italy in key industrial sectors, including telecommunications, renewable energy, defense and shipping.
The comments followed remarks by the chief executive of French telecoms company Orange (ORAN.PA) that he might look into the idea of a merger deal with Telecom Italia (TLIT.MI) if the chairman of its top shareholder Vivendi (VIV.PA) invited him to.
Telecom Italia shares rose more than 5 percent in early trade and were up 3 percent by 0930 GMT, outperforming a 0.9 percent rise in the European telecoms index .SXKP.
"It's the Renzi-Hollande meeting that's triggered this," a Milan-based trader said.
Asked about the possibility of Orange buying into Telecom Italia, Prime Minister Matteo Renzi said any foreign investor with resources and ambition were welcome to enter the Italian market.
French and Italian leaders had been discussing the idea of creating cross-border champions for a while, a banker told Reuters last year, as companies in the two countries "are simply too small to compete as U.S. and Chinese investors create ever bigger groups".
Any tie-up between Orange and Telecom Italia would require French state backing as it owns 23 percent of Orange. Italy does not own a stake in Telecom Italia, but has a say over so-called strategic assets, including the phone group's network.
Telecom Italia, which has net debt of around 27 billion euros ($30 billion), is widely seen as a potential takeover target in a consolidating industry, partly because of its relatively small size.
"We see the European telecom market as a single legal entity: in this scenario, there would be room for just a few players," Mediobanca said in a note.
Vivendi has gradually built up a stake of 23.8 percent in Telecom Italia and has secured four seats on its board, giving it greater sway over strategy at the former state monopoly.
Some analysts were skeptical about the benefits of an Orange-Telecom Italia combination, especially given Telecom Italia's debt burden and the French state interest.
While major savings can be reaped from telecoms deals within countries, the case is less clear for cross-border ones where local networks and commercial operations are not being combined.
One trader said a paper offer with a 30 percent premium would dilute the French state to 14 percent, which would be "too much for Italy to digest, and too low for France".
Reporting by Stephen Jewkes and Danilo Masoni; writing by Agnieszka Flak; editing by Keith Weir