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UPDATE 2-Telecom Italia profit warning exposes shareholder divisions

Agnieszka Flak

* TIM says 2018 Italian core earnings down by mid-single digit

* Shares fall more than 8 pct after profit warning

* Vivendi blames Elliott for poor results, "lack of plan"

* Final results, new strategy to be presented Feb. 21 (Adds Vivendi comment, analysts, details, updates shares)

MILAN, Jan 18 (Reuters) - Tensions between Telecom Italia's top two shareholders flared again on Friday after the Italian phone group warned of a decline in 2018 profit and said its domestic business would remain under pressure this year.

In an unscheduled release of preliminary results after a six-hour board meeting, Telecom Italia (TIM) said late on Thursday that it expects to report 2018 organic core earnings of around 8.1 billion euros ($9.2 billion).

The figure represents a drop of less than 5 percent, a person familiar with the matter said, despite an improvement in its Brazilian unit. TIM did not give any comparisons.

TIM has been caught since early last year in a battle between top shareholder Vivendi and activist fund Elliott over how to revive Italy's biggest phone group, an underperforming business saddled with 25 billion euros of debt.

Vivendi, which owns 24 percent, again lashed out at Elliott over TIM's poor results.

"We are very, very angry because there's been a lot of time wasting since Elliott took over ... we are concerned there is no plan in place and they are putting the blame on the previous management," a spokesman for the French media group said

Elliott, the U.S. hedge fund which wrested control of TIM's board last May, declined to comment.

By 1019 GMT, the stock was down 8.5 percent at 0.48 euros, underperforming a 0.7 percent rise in Milan's blue-chip index .

"KITCHEN SINK"

The two adversaries will again face off on March 29 when shareholders are asked to vote on Vivendi's request to replace five of the Elliott-appointed directors.

The French investor also vowed to call another shareholder meeting in the summer if results do not improve.

TIM said it expects to report a mid-single digit drop in organic core earnings for its Italian business for last year.

Analysts said the forecast suggested a sharp deterioration - as much as 10 percent - in the last quarter, much worse than they had expected.

In March last year, former CEO Amos Genish, who was abruptly replaced in November, had forecast low single digit growth in domestic organic EBITDA for the years 2017-2020.

New CEO Luigi Gubitosi "is throwing the kitchen sink at his predecessor's ambition to grow domestic EBITDA," Bernstein analysts wrote in a note.

"The opaquely worded outlook for 2019 suggests that the bad news is likely to keep flowing as the company seems rudderless and adrift in turbulent waters," they added. Bernstein has an "underperform" rating on the stock.

The company, which has been facing growing competition in both fixed infrastructure and mobile, said the "competitive dynamics" that impacted its Italian business last year are also expected to influence 2019, especially the first half.

Broadband group Open Fiber is rolling out a rival fiber optic network to TIM's, while French telecoms group Iliad has launched a low-price mobile offer for Italy.

The incumbent's finances have also been stretched after it bid 2.4 billion euros - much more than initially planned - to secure airwaves in Italy's fifth-generation mobile auction.

TIM's board is set to approve final results for 2018 and its business plan for 2019-21 on Feb. 21.

In the new plan, Gubitosi is expected to pursue the activist agenda proposed by Elliott, which includes plans to spin off TIM's network, sell assets and convert savings shares.

Under former CEO Genish and with Vivendi's approval, the former state phone monopoly had been pursuing a three-year turnaround plan, focused on digital transformation, fixing its finances and returning TIM to investment grade rating. ($1 = 0.8782 euros)

(Reporting by Agnieszka Flak Editing by Toby Chopra/Keith Weir)