UPDATE 1-Surprise convertible bond hits Telecom Italia shares
* Investors stitching to bond -traders
* New plan seen as necessary step to fix balance sheet
(Recasts, adds trader and analyst comment, share price)
MILAN, Nov 8 (Reuters) - Shares in Telecom Italia fell over 4.5 percent on Friday after the company outlined a plan to raise 4 billion euros ($5.4 billion) to strengthen it balance sheet and issued a convertible bond.
Unveiling a shift in strategy that will also see the group sell its Telecom Argentina unit, Chief Executive Marco Patuano said late on Thursday that the measures would help the heavily indebted firm support investments at home in recession-hit Italy and in the growing Brazilian market.
On Friday, Telecom Italia raised 1.3 billion euros through the 6.75-pct mandatory convertible bond, which will be redeemed in ordinary shares in three years time.
Steps to help the group return to growth also included the sale of 17,000 cellphone transmission masts in Italy and Brazil and its digital broadcasting activities - sales that Telecom Italia says would bring in about 2 billion euros.
The plan has the backing of core investor Telefonica of Spain, Europe's biggest telecoms operator and Telecom Italia's biggest shareholder. Telefonica agreed in September to gradually take over the Italian company from next year.
Investors sold Telecom Italia shares to rebalance portfolios after buying into the convertible bond, traders said.
"There is arbitrage going on as investors switch from shares to the bond," one Milan-based trader said.
However, analysts also said that the plan was a step forward by Patuano, who took over from long-standing boss Franco Bernabe just a few weeks ago, and would strengthen the capital base of a company that has been hit hard by a long recession and a price war on its home turf.
"The company has a revolver pointing at its head. They have to do it," a Milan-based fund manager said. "It's a step in the right direction."
At 0930 GMT shares were down 4.6 percent at 0.687 euros. In the last three months, the stock has risen 46 percent on speculation there would be asset sales.
Patuano told analysts on Thursday he considered lucrative Brazilian unit TIM Participacoes, which has been at the centre of such speculation, a core asset. But he added that the unit may be sold at a "convincing price".
A source familiar with the matter has said Telecom Italia wants at least 9 billion euros for its stake in TIM.
One analyst said expectations that it could sell its Brazilian asset had been so high, that the news it was not to be offered for now had generated some disappointment.
Telecom Italia said it had already received an offer for Telecom Argentina.
Argentinian newspapers said late on Thursday that the buyer of Telecom Argentina would be investment fund Fintech, which already holds shares in the unit. Fintech could not be reached for comment.
Patuano's new strategy aims to chart a course out of Telecom Italia's heavy debts and deteriorating business in its home market by ploughing money into upgrading its creaking Italian fixed-line network. ($1 = 0.7472 euros)
(Reporting by Stephen Jewkes and Danilo Masoni; Editing by Lisa Jucca and Alastair Macdonald)