Telecom Italia will do grid deal only if rest of business is sustainable

By Elvira Pollina

MILAN (Reuters) -Telecom Italia (TIM) will finalise the sale of its prized network only if the finances of the service business that will be left behind remain sustainable, the head of Italy's biggest telecoms company said on Thursday.

Debt-laden TIM has granted U.S. fund KKR an exclusivity period until the end of September to negotiate a binding bid for Netco, a venture comprising both TIM's fixed domestic access grid and submarine cable unit Sparkle.

The U.S. fund has offered some 23 billion euros ($25.1 billion) when a number of variable items are factored in, people close to the matter have said.

The sale of the company's backbone network is a key part of TIM CEO Pietro Labriola's efforts to reshape the debt-crippled former monopoly, hit by intense price competition on its home turf which has steadily eroded earnings over the past decade.

However, the plan has met resistance from TIM's top investor, Vivendi, which is demanding a higher valuation to back a deal and raising concerns over the sustainability of the remaining service business.

TIM won't pursue the network deal if the price offered is below a "certain threshold" which would enable the cash-bleeding company to slash its 26 billion euros debt pile, Labriola told Il Sole 24 Ore newspaper on Thursday.

DEBT WORRIES

TIM's Milan-listed shares fell as much as 3% on Thursday morning after the company reported second quarter earnings broadly in line with expectations, with analysts citing concerns on rising debt.

"The deal will be finalised only if...the remaining [service] business stays financially and industrially sustainable," added Labriola, whose term expires next year.

With its 24% voting stake, French media giant Vivendi could throw a spanner in the works at any TIM shareholder meeting to vote on a deal, which in Labriola's view could be completed within 12 months.

Speaking to analysts in post-results analyst call, Labriola said he does not further delay for the binding offer deadline beyond September.

He acknowledged that having Italian-state backed entities on board as part of KKR's bid would make easier to receive government blessing under the so-called golden power rules used to protect strategic assets. ($1 = 0.9150 euros)

(Reporting by Elvira Poliina,Editing by Gianluca Semeraro, Mark Potter and Keith Weir)