MILAN (Reuters) - The board of Telecom Italia <TLIT.MI> will meet on Thursday to discuss a potential tie-up with Hong Kong-based Hutchison Whampoa <0013.HK>, which sources familiar with the talks say is targeting nearly 30 percent in the Italian group.
Chairman Franco Bernabe, under pressure from shareholders to improve margins at debt-laden Telecom Italia, is likely to win permission from the board to deepen talks, which both Telecom Italia and Hutchison said this week are at a preliminary stage.
Italian newspaper Il Messaggero on Thursday reported that Bernabe and representatives from Hutchison have already signed a non-binding, confidentiality agreement to continue discussions.
"It would be correct to give a mandate to Bernabe to explore the Hutchison option," a source familiar with the thinking of shareholders in controlling holding Telco told Reuters.
The board meeting, which takes place in Milan, is due to start at 7.30 a.m. British time.
A second, senior source said it would be "irresponsible" from the part of shareholders to completely turn down the integration plan if it made industrial sense and offered good financial returns.
Yet Telco investors, who have controlled the Telecom Italia board since 2007, have yet to take a stance on the plan, which they have not yet seen in detail.
Telecom Italia and Hutchison were not immediately available for comment. Telco said in a statement this week its investors have had no contact with either Hutchison or Telecom Italia over the proposed tie-up.
Telco is 46.2-percent owned by Spanish telecoms group Telefonica <TEF.MI>. Insurer Generali <GASI.MI> owns 30.6 percent and banks IntesaSanpaolo <ISP.MI> and Mediobanca <MDBI.MI> own 11.6 percent each.
The deal could meet with political opposition in Italy given the strategic importance of Telecom Italia's fixed line network. The Italian treasury has a golden share in the former Italian monopoly.
A deal could also face regulatory hurdles, as in the case of a recent merger deal in the mobile phone market in Austria.
According to sources close to the negotiations, Hutchison is prepared to buy out the three Italian investors in Telco and would swap its struggling Italian mobile phone unit 3 Italia for Telecom Italia shares.
This could create a conflict with Telefonica.
"There is no place for two industrial partners in Telecom Italia," said the first source.
The deal is expected to create synergies that some analysts estimate at around 500 million euros and improve margins as it would reduce to three from four the number of players in Italy's mobile phone segment.
Analysts value 3 Italia at up to 2 billion euros, equivalent to six times estimated 2013 group core earnings (EBITDA).
According to the sources, Hutchison could also be prepared to purchase the around 12.1 percent of Telecom Italia indirectly owned by the Italian investors of Telco at a price not far from a book value of 1.2 euros per share.
The high book value, twice the current market price of 0.6 euros a share, has represented a hurdle to any tie-up between Telecom Italia and another industrial player as shareholders are not prepare to swallow big losses in a merger deal.
Last year, they turned down a 3-billion-euro cash offer by Egyptian telecoms tycoon Naguib Sawiris that would have valued their shares at 0.7 euros each.
(Reporting by Lisa Jucca; editing by Jason Neely)