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The Deal: Telecom Italia Faces Shakeup as Deadline Looms

NEW YORK ( TheStreet) -- The potential end of a shareholder pact and the likely exit of at least a few key investors could galvanize a white knight for struggling Telecom Italia (TI - Get Report) as Europe's phone market consolidates.

The Rome and Milan-based company is seen as a key target as telecom dealmaking reaches fever pitch. However, Telco, a consortium of investors holding 22.4% of the company, has long posed an obvious hurdle.

That may change this month since the pact that governs Telco's holding must be renewed by Sept. 28. The Telco consortium is comprised of Madrid phone giant Telefónica (TEF) as well as Italian financial services companies Intesa Sanpaolo, Mediobanca and Assicurazioni Generali.

Mediobanca has already said it wants out, and Generali has said it would wait for the right conditions. Telefónica is seen as a potential suitor but may also be willing to sell up to buy elsewhere.

Simplifying or canceling the pact would open the door to anyone willing to take on Telecom Italia and its 28.8 billion euros ($38 billion) of net debt, which is almost three times its current market cap.

Its financial struggles have already spurred bid interest. Last year Telecom Italia rejected an offer of as much as ¿5 billion from Egyptian telecom investor Naguib Sawiris, the founder of Egypt's Orascom Telecom Holding, for a minority stake.

And earlier this year Hong Kong phone company Hutchison Whampoa offered to buy Telecom Italia's cellular business and fixed-line customers. The suitor, controlled by billionaire Li Ka-Shing, wanted to merge it with its own HG3 Italian cellular business, which is known as Tre.

Hutchison and Telecom Italia were unable to reach an agreement.

Telecom Italia is already working to carve-out its fixed-line network and sell at least part of it to state bank Cassa Depositi e Prestiti.

Although the Italian state views Telecom Italia as a strategic asset, analysts believe the government would approve a deal to rescue the company.

Telecom Italia is not just attractive as a platform for expanding in Europe, the company also gets 40% of its sales from its TIM Brazil division. The European angle coupled with Brazil makes it attractive, wrote Sanford C. Bernstein & Co. LLC analyst Robin Bienenstock recently.

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