ROME (Reuters) - Telecom Italia (TIM) is open to selling a stake in its soon-to-be-created network company and list the unit, but only once it becomes a fully regulated business to ensure stable returns, two sources with direct knowledge of the matter said.
TIM, whose top shareholder is French media company Vivendi with a 24 percent stake, is putting its network assets into a separate company (NetCo) fully controlled by TIM, a move likely to take 12-18 months. A final proposal to the communications regulator will be filed in the coming days.
Last week, activist investor Elliot, which has built up a stake in TIM and wants to replace six board members to shake up how Vivendi is running the company, said it would push for NetCo's listing to unlock value.
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"You cannot list the network without an adequate regulatory framework and without the ability to stabilize the cashflow which is shrinking. The asset needs to acquire regulated asset base (RAB) status first," one of the sources said.
Under a RAB-based scheme, on top of fixed tariffs paid by users, operators get regulated returns on investments they make in the infrastructure.
TIM CEO Amos Genish has not ruled out selling a stake in NetCo in future, but would like control to remain with TIM.
Any decision on a future IPO also needs to take into account TIM's remaining commercial operations, given the network - valued by analysts at up to 15 billion euros ($18.5 billion)- is used as collateral for part of TIM's debt.
"Ratings agencies are nervous and there is credit risk deriving from a potential spin-off," the source said.
Elliott has also said it favors the creation of a single national network, which suggests it would push for the merger of NetCo with rival Open Fiber, a broadband firm jointly owned by utility Enel and CDP.
TIM is open to buying Open Fiber, the source said, but not at any price.
Asked about Elliott's plan to replace six board members, the source said TIM rejected the idea of a board overhaul, adding a fully independent board would make reaching consensus difficult.
"Management would not be confident it has the backing of the majority of the board," the source said, adding an alternative would be to allow Elliott to put two members on the board.
TIM's board will discuss Elliott's proposals on Thursday, while investors will vote on the suggested board changes on April 24.
Elliott also wants TIM to convert its saving shares into ordinary shares to help cut debt, and to reintroduce dividend payments.
Genish has said TIM will pay dividends when financially feasible and the savings share conversion - last voted on in 2015 but blocked by Vivendi - would be discussed in due course.
"The savings share conversion is only convenient if the spread between the two types of shares is 20 percent," the source said. The spread stood at around 13 percent on Wednesday.
(Reporting by ROME newsroom; Writing by Agnieszka Flak; Editing by Mark Potter)