Telecom Italia, which has received approval from its board to pursue a possible merger with Hutchison Whampoa's Italian business, said billionaire Li Ka-shing's company would want control of any combined entity.
Any transaction was likely to be held "via contribution in kind or merger", subject to Hutchison acquiring a stake in Telecom Italia to "become the leading shareholder of the company", Milan-based Telecom Italia said in a statement after a board meeting yesterday.
A deal would combine Italy's biggest wireless carrier with the No4, Hutchison's 3 Italia, which is valued at about €1.5 billion (HK$15.2 billion) based on its reported earnings and multiples of publicly traded European carriers.
An entry by Hutchison as shareholder could unravel a six-year pact at Telco, whose investors Telefonica, Intesa Sanpaolo, Assicurazioni Generali and Mediobanca together hold 22.4 per cent of Italy's former phone monopoly.
"If Hutchison takes control, investors such as Telefonica will probably have to sell their stake or at least reconsider their position," said Francisco Salvador, a strategist at FGA/MG Valores. "The entrance of a powerful investor such as Hutchison Whampoa through a potential merger would help Telecom Italia solve part of the problems."
Representatives of Telefonica, Mediobanca, Generali and Intesa Sanpaolo declined to comment.
"Contacts between Telecom Italia and 3 Italia on possible business combinations are still preliminary and exploratory," Hutchison said in a statement.
For Hutchison, Asia's biggest investor in European wireless networks, Telecom Italia's high net debt - which reached €28.3 billion at the end of last year, adjusted for some items - was a concern, a person familiar with the matter said, asking not to be identified. Telecom Italia has a market value of €11.5 billion.
The carrier's board designated chief executive Franco Bernabe to lead a panel to explore the feasibility of a merger with Hutchison. Other members include Telefonica's Julio Linares, Elio Cosimo Catania from Intesa Sanpaolo, Gabriele Galateri from Generali and independent director Luigi Zingales.
They would verify "within a short time the company's interest in carrying on such a transaction", Telecom Italia said in its statement yesterday.
The fact Bernabe would not be leading the talks alone was a signal that some investors were not satisfied with his performance, two people familiar with the matter said. And some Telco investors were sceptical about a merger because no business plan had been presented, one said.
Telecom Italia shares rose 4.5 per cent to 64 euro cents in early trade in Milan yesterday - just over half their €1.20 valuation by Telco investors after they wrote down their stake earlier this year.
The stock dropped to 53.6 euro cents on April 3, its lowest level since August 1997. It has gained 14 per cent since April 4, when the planned Hutchison discussions were first reported.
Hutchison shares yesterday closed 0.9 per cent lower at HK$81.25.