ROZZANO, Italy, Dec 20 (Reuters) - Telecom Italia's shareholders were meeting on Friday to decide whether to oust the entire board in an attempt by dissident investors to weaken the increasingly powerful influence of rival Spanish group Telefonica.
The potentially disruptive decision comes as Telecom Italia struggles to revive years of sluggish growth and Chief Executive Marco Patuano has to move ahead with asset sales to help cut debt of more than 28 billion euros ($39 billion).
In his speech at the start of the meeting Patuano denied allegations that the board was being directed by Telefonica.
But the rebel investors led by businessman Marco Fossati, who holds 5 percent through his holding company Findim, fear that without their intervention the company will rush into selling its Brazilian mobile business TIM Participacoes , a smaller rival to Telefonica's Vivo.
"Telefonica will force us to sell even TIM Brasil. Patuano, if you remain in charge today, please do not allow TIM Brasil to be sold," one retail investor at the meeting said.
The dissidents have also criticised Telecom Italia's recent issue of a 1.3 billion euro convertible bond, contending that they were excluded from the dilutive deal, as well as the recent sale of its 22.7 percent key stake in Telecom Argentina for $960 million.
"In truth shareholder Findim only stated, without giving proof, that the board of Telecom was the target of Telefonica's external direction, basing himself on an unproven theory," Patuano told the meeting which started at 1000 GMT.
If the activist campaign fails, Telecom Italia will continue with a strategy outlined last month by Patuano for asset sales to fix its balance sheet and fund much-needed investments in its ageing domestic network.
But Fossati said the company could still face legal action if the vote was lost.
"We hope that institutional investors might come together and allow that the board be removed. If this is not the case ... it will be necessary to promote the company's interest in different ways than via the shareholder vote," he told the meeting.
Friday's vote pits Fossati, Telecom Italia's third-biggest shareholder with his 5 percent stake, against Telco, the investment vehicle owned by Telefonica and a group of Italian financial institutions that managed with its 22.4 percent stake to appoint the majority of the current board.
Fossati initially appeared to have little chance of success but backing from two groups who advise institutional investors on which way to vote at such meetings, MSCI's ISS and Glass Lewis, has made the outcome of the vote more uncertain.
Investors with a combined 54.26 percent stake were present at the meeting, meaning Telco will need the backing of other investors to defeat the motion, according to The latest estimate of attendance given by the company.
To go through, the proposal needs a majority of 50 percent plus one vote of shareholders at the meeting.
"There is total uncertainty," an investor present at the meeting said, referring to the possible outcome of the vote.
U.S. money manager BlackRock has raised its stake in Telecom Italia to around 10 percent, making it the second largest investor in the company with a potentially pivotal role in the vote, but has not disclosed its intentions.
TELEFONICA UNDER SCRUTINY
Telefonica has 66 percent of Telco and recently secured an option to gradually take over the stakes of its partners Assicurazioni Generali, Intesa Sanpaolo and Mediobanca from 2014.
Following that deal, Brazil's anti-trust watchdog has told Telefonica to either sell its indirect interest in TIM Participacoes, which has a market value of nearly $12 billion and is 67 percent owned by Telecom Italia, or seek a new partner for its own $20 billion local business, Vivo.
Telefonica's goal, according to sources familiar with its plans, is break up TIM Participacoes and divide its assets and network up among Vivo and the other two mobile operators in Brazil, America Movil and Oi.
Several sources familiar with the matter said on Wednesday that Telefonica would get 18 months to reach a solution.
Meanwhile Italian prosecutors said on Friday they were investigating the shareholding structure of Telco.
"The Rome prosecutors' office, since the first days of October this year, has closely followed the developments of the Telecom affair" a statement from chief prosecutor Giuseppe Pignatone said.
Telefonica declined to comment and other shareholders within Telco could not immediately be reached.