RPT-UPDATE 2-Telefonica tightens grip on Telecom Italia
* To lift stake in holding that controls Tel Italia
* Will need regulatory approval to take full control
* Deal increases Telefonica's influence at limited cost
* Prevents third party from taking control
* Telefonica shares steady, Tel Italia up 3.3 percent
MILAN, Sept 24 (Reuters) - Spanish telecoms group Telefonica has struck a deal which could eventually see it take control of Telecom Italia and its lucrative south American business without having to launch a full takeover bid.
Telefonica said on Tuesday it had agreed cash-and-share deals worth around 860 million euros ($1.2 billion) to increase its stake in Telco, the controlling shareholder in Telecom Italia which it currently co-owns with some Italian investors.
Under a complex series of transactions, Telefonica will only gain full control of Telco - and therefore Telecom Italia - following approval by antitrust regulators.
But for the time being the Spanish group has ensured that Italian partners looking to cut their exposure to Telecom Italia have not sold their shares to another party.
Despite heavy debts and sinking margins at home, Telecom Italia is viewed as a potential takeover target thanks to its prized Tim Participacoes (TIM) mobile unit in Brazil.
Telecom Italia has been the target of interest from Egyptian tycoon Naguib Sawiris and Hong Kong-based Hutchison Whampoa , while U.S. telecoms group AT&T has also had contacts with the firm, people close to the matter have said.
Tuesday's move by Telefonica, which is looking to pay down its own debt while its German arm is also in the midst of a costly acquisition, ensures it will retain a strong influence in what happens to Telecom Italia and TIM, at a limited cost.
"We believe this additional investment made by Telefonica in Telco was the price the company was willing to pay to keep its options open at Telecom Italia and keep at large any other third party that could be interested in Telecom Italia and especially its Brazilian assets," Espirito Santo analysts said.
Some analysts think Telefonica might push for a sale and break up of TIM, estimated to be worth around $10 billion, which might strengthen its own position in Brazil.
Telefonica said it would increase its stake in Telco, which appoints a majority of members to Telecom Italia's board, to 66 percent and then to 70 percent via two capital increases.
These value the Telecom Italia shares owned by its Italian partners in Telco - Generali, Intesa Sanpaolo and Mediobanca - at 1.09 euros apiece.
That is nearly twice the current market prices, but below book value for two of these investors - all of which have written down the value of their 2007 investment.
The Spanish company will also use some of its shares to pay down some of Telco's debt.
But its voting rights in Telco will remain unchanged at 46 percent - and it will not be able to fully buy out its Telco partners - unless the plan is approved by antitrust regulators, including those in Brazil.
Moreover, the Italian investors in Telco will retain the right to unwind the pact in June 2014, leaving some uncertainty over the future.
At 1240 GMT, Telefonica shares were down 0.2 percent at 11.25 euros, while Telecom Italia's were up 3.2 percent at 0.609 euros.
"The deal brings no benefit to minority shareholders since it's all at the holding level," said Stefano Fabiani, a fund manager at Zenit Sgr. "But valuing Telecom Italia shares at 1.09 euros has set a theoretical upside and if tomorrow there's any offer, that can't go unobserved."