DEALWATCH: Telefonica Tepid On TI Despite Italy Chatter

Italian investors, bankers and politicians may be pushing hard for a quick takeover of Italy's biggest telecommunications company by a much bigger Spanish rival, but if it is up to the alleged acquirer, they won't get any satisfaction anytime soon.

People with knowledge of Telefonica SA's (TEF) plans say the Spanish telecoms behemoth isn't too excited about taking over its smaller Italian peer Telecom Italia SpA (TI). While in the long term, such a deal could make sense, these people say it's too early in the game for a costly transaction that would involve significant political and financial risk.

Speculation about a potential tie-up has been rife in the Italian media in recent weeks, causing big fluctuations in Telecom Italia's share price, although it has been conspicuously absent in Spanish newspapers. Telecom Italia, which is suffering under a EUR34 billion debt load and is strapped for cash, was long ago relegated to a second-tier player in Europe, lagging behind faster growing rivals like Vodafone Group PLC (VOD), Telefonica, France Telecom SA (FTE) and Deutsche Telecom AG (DT).

It owns an outdated telecommunications network in need of upgrades in a market that is seen as mature, with limited growth potential. Telefonica's main hopes for growth remain in Latin America, where penetration rates are still low enough to pick up customers for its mobile and broadband businesses.

If anything, Telefonica would be interested in buying TI's successful Brazilian venture, TIM Participacoes SA (TSU), after its recent failed attempt to take over broadband operator GVT there, the people familiar with the matter said. Brazil's leading telecom operator, Vivo Participacoes (VIV), is jointly controlled by Telefonica and Portugal Telecom SGPS SA (PT).

Telefonica bought a stake in Telecom Italia in 2007, through a holding company that it owns together with Italian banks Mediobanca SpA (MB.MI), Intesa Sanpaolo SpA (ISP.MI) and insurer Generali SpA (G.MI). The holding company, Telco, owns 22.4% of the company, making it the dominant shareholder.

But as Telecom Italia's revenue slumped and the company suffered under its debt load, the value of Telco's shares have slipped to 60% below the price at which they were acquired.

That may explain why some bankers close to Telecom Italia have also been talking up the possibility of a merger in recent weeks, these people say.

Although Telefonica has conducted some selective acquisitions recently, it has also been cutting expenses and capital expenditures over the last year in response to weak European markets to honor its dividend commitments.

-By Christopher Bjork, Dow Jones Newswires, [phone], [e-mail]