Telecom Italia board meets to discuss takeover proposal from KKR - Reuters

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Telecom Italia's logo for the TIM brand is seen on a building in Rome, Italy, April 9, 2016. REUTERS/Alessandro Bianchi/File Photo

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• Goal is to spin off fixed line, run it as govt-regulated asset
• KKR targets TIM-Open Fiber grid merger but decision with govt
• Embattled TIM CEO pushing to revive single-network plan
• Rival CVC has also looked at plan for TIM - source

MILAN, Nov 21 (Reuters) - The board of Telecom Italia (TIM) (TLIT.MI) meets on Sunday at 1400 GMT to discuss a takeover proposal from KKR (KKR.N), two sources said, adding the U.S. fund plans to carve out the Italian phone group's fixed network in which it is already an investor.

TIM's fixed line is its most prized asset and is deemed strategic by Rome, which has powers to block any unwanted moves.

The government of Prime Minister Mario Draghi is also aware of the need to stem TIM's revenue haemorrhage, shoring up the debt-laden group at a time when it needs to step up investments, and protect its 42,500 domestic workers, sources have said.

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TIM CEO Luigi Gubitosi last year struck a 1.8 billion euro ($2 billion) deal with KKR which handed the New York-based fund a 37.5% stake in FiberCop, the unit holding TIM's last-mile network connecting street cabinets to people's homes.

Under fire by TIM's top investor Vivendi (VIV.PA), Gubitosi has been looking at how to squeeze money out of TIM's assets, revisiting in particular a plan to merge TIM's fixed-line grid with that of fibre optic rival Open Fiber.

Sponsored by the previous government, that project had run aground under Draghi's executive.

KKR's scheme envisages a single network to be run as a government-regulated asset along the model used by energy grid company Terna (TRN.MI) or gas grid firm Snam (SRG.MI), one of the two sources and a third person close to the matter said.

Also rival private equity firm CVC has studied possible plans for TIM working with former TIM CEO Marco Patuano, now a senior adviser to Nomura (7131.T) in Italy, four people close to the matter said.

To overcome political and regulatory opposition to the single network's plan, Gubitosi has opened up to the possibility of TIM ceding control of the combined entity, something which Vivendi had always been opposed to.

Vivendi, which is pushing to replace Gubitosi at the helm and faces a steep capital loss on its 24% stake in TIM's as its shares languish near all-time lows, does not oppose KKR's proposal, two of the sources said.

One of them said Vivendi could also be open to considering CVC's one were it to go ahead with it. Vivendi generally looks favourably on all options to boost TIM's value but wants to be directly involved in discussions, another source said.

A spokesperson for Vivendi denied any contacts with funds at present and said the French media group remained ready to work alongside Italy's authorities and institutions for TIM's long-term success.

GOLDEN POWERS

The activism around TIM comes as Italy prepares to deploy billions of euros of European Union's recovery funds to boost digital connectivity in the country and catch up with the rest of the bloc.

To oversee a strategic asset such as TIM's fixed-line grid, state investor CDP has taken a 9.8% stake in the former phone monopolist, becoming its second-largest investor after Vivendi.

CDP will present a new strategic plan on Thursday after Dario Scannapieco, a close ally of PM Draghi, recently took the reins.

CDP has invested in both Terna and Snam, as well as gas distribution grid Italgas (IG.MI), through its CDP Reti vehicle it set up in 2012 to hold stakes in network assets.

KKR plan can only proceed with the government's assent because Rome has special anti-takeover powers to shield companies deemed of strategic importance from foreign bids.

Italy has so far used these so-called "golden powers" four times since 2012 to veto foreign interests in the country. Two of these have been under Draghi's ninth-month old government.

TIM's fixed network is also a key asset supporting the group's 29 billion euro gross debt which was cut further below the investment grade level by credit rating agency S&P on Friday. read more

S&P said the single-network project could weaken TIM's business profile if it lost control of the combined entity, however it was impossible to evaluate the impact of a potential transaction without knowing the details, because the proceeds could also help TIM cut debt and counter falling revenues.

News of Sunday's extraordinary board meeting was first reported by Italian daily Corriere della Sera.

TIM's revenue have shrunk by a fifth over the past five years hit by aggressive competition at home from rivals such as Iliad, Vodafone (VOD.L), Wind Tre and Fastweb.

($1 = 0.8859 euros)

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Additional reporting and writing by Valentina Za; editing by Andrew Heavens and David Evans

Our Standards: The Thomson Reuters Trust Principles.

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