Spain's Telefonica faces dilemma over strategic Italian holding

Mon Sep 9, 2013 1:00pm EDT
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By Robert Hetz

MADRID (Reuters) - Spanish telecoms group Telefonica (TEF.MC: Quote) has a big Italian headache.

Six years ago it bought a chunk of Telecom Italia (TLIT.MI: Quote), which at the time was seeking a "white knight" to put off what the Italian government saw as less palatable foreign suitors.

Now the Italian investors who together with Telefonica control Telecom Italia are prepared, in varying degrees, to sell their shares when they get their first opportunity to leave the shareholder pact on September 28, sources have said.

That could force Telefonica to make a tough decision - either sell out, taking a further loss on its investment, or cough up money it does not have to maintain its influence.

What makes the call particularly tricky for the Spanish company is that its Telecom Italia holding has helped it protect its position in important growth markets in Latin America.

The two European firms are rivals in Brazil and Argentina, where they control the two biggest mobile telephone operators.

Although Telefonica is excluded from board deliberations about Telecom Italia's Brazil unit, the Spanish firm has benefited over the years from having a say over the strategy and operations of one of its rivals in Latin America.

Now that situation is under threat.   Continued...

A man walks past Telefonica's building in central Madrid March 26, 2013. REUTERS/Juan Medina