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T. Italia Shares Hit 10-Year Low as Debt Fears Grow

Telecom Italia shares slid to a 10-year low on Friday as a grim sales outlook and plans to expand overseas in a much-heralded new strategy stoked fears over its costly debt.

Europe's fifth largest phone group by market capitalization said it would nearly halve its dividend to help pay for net debt of 35.7 billion euros ($55.01 billion), well above Telecom Italia's market cap of 29.4 billion euros.

Cutting the ordinary dividend on 2007 results to 8 euro cents from 14 euro cents will save 803 million euros.

"The debt is worrying. It is not sustainable for a company to have 35 billion euros in debt with revenue of 31 billion euros, especially now that it's so difficult to raise capital on the markets," said one trader.

The cost of debt will be 5.6 percent in 2008, Telecom Italia said, in line with last year.

Shares were down 9.1 percent to 1.44 euros, having hit a 10-year low of 1.46. The group's credit default swaps widened to 235 basis points.

The company had one of the highest dividend yields in the sector when it was owned by Italian businessman Marco Tronchetti Provera, but he sold out to a group of investors including Spanish telecoms giant Telefonica last year.

Those new owners, who control Telecom Italia with a 23.6 percent stake, changed the management team in December, appointing as chief executive Franco Bernabe, who headed the company once before in the late 1990s and comes from Rothschild.

Telefonica Chairman Cesar Alierta said the new strategy "has our total support," when speaking to journalists on Thursday.

No Fireworks

Bernabe said on Friday his team would work hard to give investors confidence in the company.

"Don't expect fireworks from us," he told analysts at a presentation in Milan.

"We are down-to-earth managers," he said, adding the group did not have the money to do otherwise.

The plan aims to reverse years of falling profits and a shrinking international presence by cutting debt and expanding in countries including Brazil and Argentina -- where Telecom has already faced regulatory scrutiny as Telefonica also operates there.

Telecom's target of just 1-2 percent a year revenue growth between 2008-2010 and earnings before interest, tax, depreciation and amortization (EBITDA) of 39 percent of revenues, disappointed the market.

It sees 2008 sales of 31 billion euros and an EBITDA margin of 38.5 percent.

"New 2008 guidance ... (is) well below the previous range and 5 percent short of our ... forecast," Cheuvreux analysts wrote in a note. "2008 looks like a tough year for Telecom Italia," they added.

Bernabe acknowledged that the plan could be revised before the year is out and he got to know it better.

It envisages that cash generated by industrial activities will allow the group to make investments of around 15 billion euros, fair compensation for shareholders, and a gradual decrease in the debt/EBITDA ratio to below 3 by end 2008, and to approximately 2.5 by end 2010, Telecom said.

Telecom's plan compares with Telefonica's expectations of operating income before depreciation and amortization growing between 7.5 percent and 11 percent this year and sales up by 6 to 8 percent.

Telefonica controls Telecom Italia with Italian banks Intesa Sanpaolo and Mediobanca, insurer Generali and the Sintonia holding company.

Telecom Italia Chairman Gabriele di Genola said on Friday that Telefonica and Telecom Italia will continue to be managed separately.

On Thursday, Telecom Italia said it would propose a dividend of 8 cents a share in order to retain more cash to reduce debt.

Analysts had been expecting a cut to 6-11 cents a share.

This came as it reported a 19 percent drop in 2007 net profit on falling margins and revenues, particularly in its domestic fixed-line operations due to greater competition.