By Robert Hetz
MADRID, Sept 11 (Reuters) - Telefonica is studying different options to buy out fellow investors in Telecom Italia without the Spanish group adding to its own substantial debt burden, a source familiar with the situation told Reuters on Wednesday.
That offer could take the shape of a share swap or even mean Telefonica may have to divest some assets to be able to pay cash, analysts say.
The Italian company, controlled by holding company Telco in which Telefonica is the largest shareholder, will hold a board meeting on Sept. 19.
"Telefonica does not want to go (to board meeting) empty-handed, but the challenge is finding a solution that offers liquidity to Telco stakeholders without increasing Telefonica's debt," the source said, without elaborating on what specific format could provide a solution.
The meeting will discuss how to relaunch the heavily indebted Italian group, including a possible change of the shareholder structure and plans to boost investments.
The Italian investors in Telco are prepared, in varying degrees, to sell their shares and cut their losses since they made their investment as they get their first opportunity to leave the shareholder pact by Sept. 28, sources have said.
Telefonica has an indirect 10.5 percent stake in Telecom Italia through its 46 percent share of Telco, which was formed with Italian investors banks Mediobanca, Intesa Sanpaolo - under pressure to boost capital - and Generali.
Insurer Generali, for example, wants a buyer that can pay a hefty premium to match its book value for the stake which is about twice Telecom Italia's current market value, a source familiar with the situation has told Reuters.
Analysts said that one possibility could be to offer shares in Telefonica itself in exchange for illiquid shares in the holding, which do not trade directly.
Or Telefonica could offer cash after divesting another asset, such as China Unicom in which it has an around 5 percent stake worth about 1.5 billion euros.
But the issue is not just valuation, but politics.
"The Italian shareholders who want to leave are financial shareholders who were brought onboard Telco by the Italian government back in 2006 in order to keep Telefonica in check," said an analyst speaking on condition of anonymity.
"Now things have changed, but in the minds of Italian politicians that want to maintain Telecom as fully Italian, and leaving Telefonica as a shareholder with a 22.5 percent stake in TI might not be seen as something too comfortable," he said, adding that alternatives to Telefonica were not easy to swallow either.
Mediobanca, Intesa and Generali declined to comment on Wednesday.
Telecom Italia is seen by some analysts as a possible takeover target in a shake-up of the sector expected to be triggered by Verizon Communications' $130 billion buyout of British operator Vodafone's U.S. wireless business.
Telefonica does not want the stakes held by Telco's Italian investors to fall into the hands of a rival but its situation is complicated by its own heavy debt burden.
At almost 50 billion euros and 3.37 times equity at end-June, the Spanish group's debt is something investors and ratings agencies have been watching closely.
Before paring gains, Telecom Italia shares rose as much as 3 percent in the wake of the Reuters report about Telefonica considering an offer. By the close, the stock was up 1.3 percent at 0.6130 euros.
Sources have said an option for Telecom Italia would be a merger with Telefonica in the medium term and that operation would be preceded by a sale of Telecom Italia's Brazilian unit TIM Participacoes for antitrust reasons.