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Telefonica to Hang Up on Telecom Italia

NEW YORK ( The Deal) -- Spain's Telefonica (TEF - Get Report)  on Monday said it would likely look to step completely away from its minority Telecom Italia SpA investment should its planned Brazilian expansion succeed, placing a large question mark over the heavily indebted Italian telecom.

Telefonica Chairman Cesar Alierta on Monday said he hopes to jettison the company's 5.7% Telecom Italia stake, which carries 8.3% of the Italian group's voting rights. The Madrid-based Telefonica even offered to use the stake as part of the 7.45 billion euros ($9.8 billion) it hopes to pay Vivendi SA for Brazil's GVT SA broadband company.

Vivendi last week said it would negotiate exclusively with Telefonica in the sale of GVT, rejecting a 7 billion euro GVT takeover proposal from Telecom Italia.

Telefonica's announcement shows Telecom Italia has lost a major ally in its bid to remain a viable international phone company. The Spanish provider just a year ago had moved closer to Telecom Italia and even hinted it would be interested in buying out partners in the Telco SpA venture that once owned 22.4% of Telecom Italia.

But Telefonica's focus now appears to be elsewhere and Telecom Italia is on its own as it struggles with 27.4 billion euros in debt. The debt is not only well above its 15.8 billion euro market cap, it's also been graded as junk for nearly a year.

Telecom Italia is aware of its precarious position and this year sold about $3 billion in bonds to help readjust the liabilities. In November it also announced an agreement to sell its 68% Telecom Argentina SA

stake to Fintech Advisory LLC for $960 million. Fintech is the investment vehicle of Mexican billionaire David Martinez. That deal was set to close Sept. 1 but Telecom Italia Tuesday said it had pushed the closing back to to Sept. 25 as it awaits regulatoryapproval.

Analysts said the company has some options: sell or find a partner for its TIM Participacoes SA Brazilian unit and possibly link up with Vivendi to create a Franco-Italian media and phone company.

However, Guy Peddy an analyst at Macquarie Bank in London, said Telecom Italia may opt for none of the above: "They don't have to do anything. They've chugged along with that much debt for a decade already."

TIM is Brazil's second-largest wireless provider after Telefonica's Brazilian unit and a sale has been rumored for months -- Telecom Italia's board in February even approved a strategic review. Last week Brazilian rival Oi SA admitted it had tapped Banco BTG Pactual SA to prepare an offer for TIM.

Telecom Italia declined to comment at the time.

Other suitors could appear for TIM, eager to expand in South America's biggest economy. The interest is underpinned by Telefonica's bid for GVT -- the Spanish phone company already operates Brazil's biggest wireless company.

Should Telecom Italia want to move closer to Vivendi, the Paris-based media company could accept Telefonica's offer to take part of the GVT price tag in Telecom Italia shares and then pick up more over the market to solidify the relationship. Vivendi is already rumored to be considering a run for Mediaset SpA's premium television unit.

A deal with Telecom Italia would give the French media company an immediate link to potential consumers as well as the telecommunications infrastructure to transmit entertainment content.

Although its debt may serve as a deterrent for any would-be suitors, a Telecom Italia without a major partner is also likely to become a target and Bonn-based Deutsche Telekom AG is seen as a potential bidder.

Germany's biggest phone company has expanded into eastern Europe but has been absent in the latest round of consolidation that has seen Mexico's America Movil SAB de CV and Hong Kong's Hutchison Whampoa Ltd. make incursions into Europe.

Telekom also appears to have management capacity for integration as its problem child -- T-Mobile USA (TMUS)  -- has begun recovering. But Macquarie's Peddy said of a Deutsche Telekom move on Telecom Italia: "I see that as very unlikely considering the politics of cross-border M&A."

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