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Telecom Italia picks KKR as partner for Italian broadband

FILE PHOTO: Telecom Italia new logo is seen at the headquarter in Rozzano neighbourhood of Milan

By Elvira Pollina

MILAN (Reuters) - Telecom Italia (TIM) on Thursday picked KKR as an exclusive partner to develop its ultra-broadband business, saying its board had taken positive note of a non-binding proposal by the U.S. investment firm.

The alliance could give TIM Chief Executive Luigi Gubitosi more firepower in negotiations to create a single national fiber network with smaller rival Open Fiber.

Open Fiber is jointly owned by state utility Enel and Cassa Depositi e Prestiti (CDP), the state lender which is also a key investor in TIM with a 10% stake.

Italy's government wants the former phone monopoly and Open Fiber to create a single ultra-fast broadband player to avoid duplicating investments and modernise areas which are digital laggards.

But a deal has proved tough to hammer out, prompting Economy Minister Roberto Gualtieri on Wednesday to urge the parties to come to an agreement quickly to speed up progress on a unified ultra-fast network.

In a statement on Thursday TIM said Gualtieri's comments were "significant" and Gubitosi will inform Italian institutions in line with existing laws that give the government special powers to intervene in sectors deemed strategic.

Italy's government wants to be kept abreast of developments in talks with KKR and of any agreement, a person close to the matter said.

Gubitosi has always said the combination with Open Fiber is the most efficient solution to provide Italy with the modern broadband infrastructure the government is keen to have.

But divergences on asset valuations, the structure of a potential combined entity and its governance as well as regulatory issues have so far hampered an accord.

As negotiations on the single network project stalled, TIM invited infrastructure funds to consider an investment in the potential future combined fibre-optic entity.

KKR, which had emerged earlier this month as the preferred bidder, will support TIM as the group seeks to reach a deal with Open Fiber, a source with knowledge of the matter said on Thursday.

But it would still be TIM's partner if an accord with Open Fiber failed to materialise, the source said.

Sources have said KKR has also expressed an interest in buying a 42-43% stake in TIM's last-mile network - the cables, mostly made of copper, that run from the street to users' homes.

Debt-laden TIM, whose underperforming business is dogged by rising competition at home, can ill afford the heavy investments needed to upgrade its last-mile network.

KKR, which sources have said values TIM's last-mile network at 7.0-7.5 billion euros, could help finance the fibre-optic rollout needed for the upgrade.

TIM's top shareholder is French media group Vivendi with a 24% stake while U.S. investment fund Elliott has around 9.8%. Both agree Telecom Italia should keep control of any future venture with Open Fiber, sources have said.

(Additional reporting by Giuseppe Fonte; Editing by Kirsten Donovan, Valentina Za and Cynthia Osterman)