Telecom Italia Media said on Monday it would pump money into its cash-burning La7 channel before offloading it to media firm Cairo Communication for a token price.
The Italian broadcaster, controlled by telecoms group Telecom Italia (Rome, Italy), has agreed to sell its flagship network for 1 million euros in a deal that underscores the difficulties of Italy's media industry.
"I have taken on a hot potato," the head of Cairo Communication (Milan, Italy), Urbano Cairo, said in a radio interview after a Telecom Italia Media board meeting on Monday to approve the deal.
The sale comes as Italy's TV sector faces the prospect of being opened up after years of dominance by Silvio Berluscon's Mediaset (Milan, Italy) but the economic outlook remains clouded by the poor trend in advertising sales.
La7's share of Italy's domestic TV audience has risen in recent years thanks to popular talks shows, but it still remains at just around 3 percent, making it difficult to generate sufficient advertising revenue to cover its high costs.
The purchase of La7 would give Cairo a foothold in a commercial television market dominated by Mediaset and could also help protect its lucrative contract to sell advertising on La7, due to expire in 2019.
In 2012 La7 booked a loss of 66.3 million euros before interest, tax, depreciation and amortization (EBITDA), against a 4.7 million-euro profit in 2011, citing higher programming costs and a fall in advertising.
Under the deal, La7 will be recapitalized before the transaction to give it a positive net financial position of at least 88 million euros, while Telecom Italia will waive 100 million euros in receivables due from its subsidiary.
Telecom Italia had been looking to sell its entire 77.7 percent stake in Telecom Italia Media to help cut a 28 billion-euro debt pile and fund costly network upgrades.
Its subsidiary has a market value of 240 million euros and net debt of 260 million euros.
After the sale of La7, Telecom Italia Media would retain its profitable broadcasting infrastructure business, which leases bandwidth for La7 and other television channels.
The Milan-based company will also keep its 51 percent stake in music channel MTV Italia.
Shares in Telecom Italia Media fell 6.4 percent on Monday, against a 0.7 percent dip in the broader Milan index. Cairo shares edged 0.7 percent lower and Telecom Italia ended broadly unchanged.
Center-left leader Pier Luigi Bersani, who could become Italy's next prime minister, has spoken in favour of an overhaul of Italy's communications sector.
(Editing by David Goodman and David Cowell)