Hutchison Whampoa is losing patience with Telecom Italia over lack of progress on a proposed merger of their Italian mobile phone units, people familiar with the talks said, casting doubt on prospects for a deal.
The Hong Kong-based conglomerate, backed by Asian magnate Li Ka Shing, favors consolidation to bolster its position in its six European markets and is eager to do a deal in Italy, where it is the smallest mobile operator with a 10 percent market share.
Yet the possible tie-up between Telecom Italia (Milan, Italy) and Hutchison (Hong Kong) was put on the back burner last month, when the board of the Italian company postponed discussing the merger until an unspecified future date.
Telecom Italia's board plans to meet on Thursday to discuss its options on Hutchison's 3 Italia, after disclosing that the two had early-stage talks in April. But it may not take material steps on the deal because management is focused on a separate complex project to spin off its fixed-line business, said the sources.
"Telecom Italia has opted for the network separation. The merger with 3 Italia has been slowed for political reasons and the Chinese's patience has a limit," one of the sources said.
A spokeswoman for Telecom Italia said in a text message that the group's board would be updated on Thursday on the talks with Hutchison. "Any other comment, rumor, speculation, gossip on the matter is to be taken as totally groundless," the spokeswoman said.
No-one at Hutchison was available for comment outside regular business hours in Asia.
If the fixed-line spin-off goes forward, it would create a new company to operate Italy's fixed telecom lines into homes and business, and build a national high-speed fiber broadband network.
But ironing out the details could take a year or more: regulators in Italy and Brussels have to hammer out an agreement on how the new company would fairly sell access to all Italian operators, while being partly owned by Telecom Italia.
The proposed deal with Hutchison would involve the Asian conglomerate owning 29.9 percent of Telecom Italia, after selling its 3 Italia mobile business to the group and buying out some other shareholders.
CHANGE OF CONTROL
Since Hutchison would become the biggest shareholder of Telecom Italia, the change of control is a sticking point with some existing shareholders, especially Telefonica (Madrid, Spain), a rival of Telecom Italia in Brazil and the biggest investor in the Telco vehicle that controls Telecom Italia.
"Not all shareholders in Telco are convinced they should sell," the source said.
Other members of Telco are Italian financial groups Generali (Trieste, Italy), Mediobanca (Milan, Italy) and Intesa Sanpaolo (Turin, Italy). All have booked hefty losses on the value of their investment after several writedowns.
"The deal is up in the air," a source close to Telco said.
A third source added: "The board may well decide to postpone things on the fourth (Thursday) to have time to get a clearer idea on the network spin-off. But it's difficult to make forecasts given the different positions of the shareholders."
The talk of consolidation comes as Italy's telecom market is in the throes of a price war and a recession that has made consumers increasingly price conscious. Mobile operators Vodafone (Amsterdam, Netherlands), Telecom Italia and Vimpelcom's Wind (Rome, Italy) all saw double-digit falls in mobile service revenue in the first quarter, according to JP Morgan.
Despite the obstacles, analysts say the tie-up could ease competition in Italy, while the arrival of a cash-rich partner like Hutchison could help revive prospects for Telecom Italia, which has been struggling with high debts.
For its part, Hutchison is likely to continue hunting for a partner in Italy even if the talks with Telecom Italia fail.
Two people familiar with the matter said Hutchison and third-placed Wind had held talks over a possible merger. Such a deal would be simpler from an antitrust point of view, but could also stumble over differences in valuation and control, the people said.
A Vimpelcom (Amsterdam, Netherlands) spokesman declined to comment, saying only that it was "very happy with the performance of the Italy business".
Shares in Telecom Italia closed down 1.8 percent at 0.53 euros, while the European Telecoms index was down 0.3 percent.
In Ireland, Hutchison recently inked a deal to buy larger rival Telefonica's 02 (Dublin, Ireland).
(Additional reporting by Stefano Rebaudo, Maria Kiselyova, Lisa Jucca and Stephen Jewkes; Editing by David Holmes)