U.S. Markets open in 5 hrs 31 mins

Telecom Italia considering share issue and no dividend: sources

By Stefano Rebaudo

MILAN (Reuters) - Telecom Italia is considering a capital increase and the scrapping of its dividend amongst the options for overhauling its heavily indebted balance sheet, two sources close to the matter said on Friday.

The group is battling to cut almost 29 billion euros ($40 billion) of net debt as its business feels the pinch of Italy's deep recession, harsh competition and slowing growth in Brazil, its second-largest market.

New chief executive Marco Patuano is reviewing the group's strategy and is due to present his plans to cut debt and reverse years of sluggish growth at a board meeting on November 7.

The sources said the first measures Telecom Italia could take were scrapping its 2013 dividend and start a restructuring of its Italian activities for possible future disposals.

"They need (savings for) 1 billion euros. They are likely to scrap the dividend, which would save them some 400 million euros, and then they'll cut capex," one of them told Reuters.

The board was expected to take more time to ponder more decisive moves to bolster its balance sheet, such as a rights issue and the sale of assets including Telecom's Brazilian wireless unit TIM Participacoes, the sources said.

Earlier media reports of a dividend cancellation and possible capital increase pushed the shares down 6.4 percent to a two-week low on Friday, after a 36 percent rally in the last three months on hopes of asset disposals.

In a statement, Telecom Italia called the reports "journalistic speculation" and said it could not comment on them, adding that its 2014-2016 business plan would be presented to the board on November 7.

Telecom Italia paid 450 million euros in dividends out of its 2012 profits, half the amount it paid the year before.

A source close to the matter said earlier this month the company was considering a sale of its 67 percent stake in TIM Participacoes but wanted to reap at least 9 billion euros.

Some analysts say any sale of the Brazilian unit would take time and Telecom Italia could still decide it needs a rights issue to raise more capital.

They say a rights issue could be worth up to 2 billion euros. That amount would be lower than the 3-5 billion euro cash call advocated by former chairman Franco Bernabe, who resigned this month after a clash over strategy with the company's core investors, led by Spain's Telefonica.

In September the Spanish group reached a deal allowing it from next year to gradually take over Telco, the investment vehicle which controls Telecom Italia with a 22.4 percent stake and is owned by Telefonica, Intesa Sanpaolo, Mediobanca and Assicurazioni Generali.

Telecom Italia's credit rating was cut to junk status by Moody's earlier this month because of a failure to strengthen its balance sheet, making it more expensive to borrow money.

The group has enough cash to cover debt maturities due over the next two years, according to analysts' estimates.

(Additional reporting by Danilo Masoni and Stephen Jewkes; Editing by Greg Mahlich)