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) 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.

"Telecom Italia is the cheapest of stocks we cover," she added.

Next to Telefónica, the easiest deal to imagine would be with Vodafone ( VOD). The U.K. phone company Monday agreed to sell its 45% stake in Verizon Wireless to Verizon Communications ( VZ) for $130 billion.

A Telecom Italia takeover by Vodafone would make good on two post-sale promises made by CEO Vittorio Colao -- expanding in emerging markets and strengthening existing businesses.

The next most logical suitor, analysts agree, would be Mexico's América Móvil ( AMX). The Mexican phone company, controlled by überwealthy Carlos Slim, last year expanded into Europe by buying minority stakes in Telekom Austria and Royal KPN.

Slim is currently working to win approval to buy all of KPN from a foundation that now owns half the target and is against the deal. But he has also threatened to walk away from the proposal and may be in a dealmaking mood.

Slim has missed out on Telecom Italia once before. He and AT&T ( T) teamed up in 2007 to try to buy a minority stake in the company.

AT&T itself is also seen by Bernstein as a potential suitor.

In addition to the debt, Telecom Italia's precarious financial position coupled with increasing competition in mobile prices led rating agencies last month to warn they might cut their ratings on its bonds to junk status. With Telco preventing outsiders from stepping in, analysts began wondering if it would go to shareholders for more cash -- CEO Franco Bernabè last month said he wasn't considering a sale.

"No other company in the sector has had as many questions hanging over it this year. There's the specter of a share issue in the face of the downgrade and finding a way to stabilize earnings," wrote Société Générale SA analyst Ottavio Adorisio in a recent note where he reduced his recommendation from buy to hold.

Telecom Italia's shares were down 3.8%, or 0.21 euros, to 0.5395 euros in midday Milan trading on Wednesday.

-- Written by Andrew Bulkeley in New York