Italian state lender CDP is set to buy a stake of up to 5 percent in Telecom Italia (TIM), three sources close to the matter said on Thursday, in a move intended to safeguard Rome's interest in a company seen as strategic.
The decision comes as activist fund Elliott, which has built a potential holding of 5.7 percent in the former phone monopoly, has challenged the way TIM's biggest shareholder, France's Vivendi, manages the group.
CDP, controlled by the Italian Treasury, will decide how much of TIM it will purchase at a board meeting later on Thursday, one of the sources said, confirming reports in Italian newspapers.
The state lender intends to start buying shares immediately with the aim of taking part and voting in TIM's next shareholder meeting, scheduled for April 24, the source said.
"The objective is for CDP to become a stable and long-term financial shareholder... guaranteeing the 'Italian-ness' of the company," the source said.
A 5 percent share in TIM was worth 575 million euros ($705 million) at Wednesday's closing price.
News of CDP's plan sent TIM shares up 2.7 percent by 0944 GMT, outperforming a 1.4 percent rise in Milan's blue-chip index.
CDP does not currently hold any shares in TIM and plans to buy the shares on the market or in block orders, the source added.
Vivendi and Telecom Italia declined to comment.
Since first becoming a TIM shareholder in 2015, Vivendi has increasingly tightened its grip on the company. It now has a 23.9 percent stake and last year appointed two-thirds of the Italian phone group's board.
The hands-on approach has led to tensions with the Italian government, which considers TIM of strategic national importance. Rome eventually used its so-called "golden power" to ensure it had a say in some strategic decisions at TIM.
"What surprises me is they didn't do it before. It's a strategic asset, there's a problem of control, we don't know what Vivendi wants to do," said Roberto Lottici, fund manager at Ifigest, who does not currently own TIM shares.
"CDP did well to take this safeguarding position."
CDP's move follows a decision by TIM to put its network - its most prized asset which analysts have valued at up to 15 billion euros - into a legally separate company (NetCo) fully controlled by the phone incumbent.
Some politicians - and recently also Elliott - have advocated the creation of a single national network via the merger of NetCo with rival Open Fiber, a broadband firm jointly owned by the CDP and state-controlled utility Enel.
The two parties that came out strongest in Italian elections last month have both called for a state role in a single national network company.
Last week CDP Chairman Claudio Costamagna said the state lender had held talks with Elliott, without giving details.
Any move on NetCo would require state backing given that it is considered of strategic national importance, so getting CDP on its side would further Elliott's ambitions for the asset.
The activist fund called last month for six Vivendi-nominated board members, including TIM Chairman and Vivendi CEO Arnaud de Puyfontaine, to be replaced through a vote at this month's shareholders' meeting. With a stake of 5 percent, CDP could help Elliott's cause.
"CDP's entry in TIM's share capital could drive the share price in the short term, support Elliott's plan for the AGM April 24 and back the scenario of a one-single network company with Open Fiber," broker Banca IMI said in a note.
Following Elliott's move last month, eight board members nominated by Vivendi resigned, triggering a full board renewal at a separate shareholder meeting called for May 4.
Elliott believes there will be no need for TIM shareholders to choose a new board in May if they back the board candidates proposed by the activist fund this month. Meanwhile TIM says even if Elliott's candidates are elected on April 24, a new board would be voted in May.