BARCELONA/LONDON: Telecom Italia shares rose to a four-year high on Monday after the head of French rival Orange said a tie-up between the two phone companies would be attractive.
Both firms said no talks over a specific deal had occurred, while analysts and bankers said any combination of the two former monopolies would take time and require the political backing of Italy and France.
Orange CEO Stephane Richard's remarks in a newspaper interview on Sunday come during a period of uncertainty for the indebted Telecom Italia, with a group of investors preparing to sell their shares and Rome discussing measures that may force it into a costly network overhaul.
Telecom companies in Europe have been in a deal-making frenzy since 2013 as they seek to combine fixed-line and mobile services, exit non-core markets and cut costs. But to date no big cross-border deals have joined telecom majors, although
European regulators would like to see regional champions emerge to anchor much-needed broadband investment.
At 1210 GMT, Telecom Italia shares were flat at 1.073 euros after trading as high as 1.11 euros. Orange shares were down 0.3 percent at 16.26 euros.
A source close to Telecom Italia said a deal was unlikely any time soon: "I think it will take at least two years for any major deal.
This is because Telecom Italia needs to find a solution for Brazil and stabilise its shareholder base." The source added Deutsche Telekom was also seen as a potential bidder, though an industry banker said the German firm would want Telecom Italia to sell its Brazilian arm first.
Telecom Italia's shareholder base in the midst of change. Vivendi is due to take an 8 percent voting stake and become its largest investor when the French media group completes the sale of a Brazilian asset to Telefonica.
Meanwhile Italy's Generali, Intesa, and Mediobanca -- which used to control Telecom Italia with Spain's Telefonica -- are expected to sell their shares.
There is also uncertainty over Telecom Italia's network.
The Italian government is meeting on Tuesday to approve measures to speed up the roll-out of ultrafast networks, and a leaked decree has raised the spectre of the company having to switch off its copper wires and write off assets worth billions of euros.
"CONSOLIDATION IS NOT OVER"
While major savings can be reaped from telecoms deals within countries, the case is less clear for cross-border ones where local networks and commercial operations are not being combined.
Orange Chief Financial Officer Ramon Fernandez said as much in an interview before Mobile World Congress in Barcelona.
"This period of consolidation is not over," he told Reuters. "The national markets will rationalise further and then there will be the question of whether there will be cross-border deals. But before that occurs, it remains to be seen whether there is real value to be created with such deals."
Telecom Italia, which has 26.6 billion euros of debt but enjoys high profit margins in its home country where there is no cable competition, could become a target, bankers have said.
It also controls Brazil's TIM Participacoes, which is seen as a bid target as well.
Bankers believe Telecom Italia would be a more attractive prospect for a European peer if it exited Brazil, and used the proceeds to pay down debt.
Any tie-up between Orange and Telecom Italia would require French state backing as it owns 25 percent of Orange.
Italy does not own a stake in Telecom Italia, but has a say over so-called "strategic" assets, including Telecom Italia's network.
BESI Research analysts were sceptical over the benefits of a deal, seeing little overlap between the two firms' operations.
"We do reckon that some savings could be reached through joint procurement, shared partnerships, etc., but these sort of efforts can be developed without the need of a merger that carries significant execution risk," they wrote.
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