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* CEO Marco Patuano needs a Plan B
* Future of Brazil unit in doubt
* Bankers, investors say Tel Italia needs new strategy
By Leila Abboud, Pamela Barbaglia and Stephen Jewkes
PARIS/LONDON/MILAN, Aug 29 (Reuters) - Telecom Italia haslost a promising path to earnings growth by failing to secureBrazilian broadband business GVT and may now turn from hunter tohunted in a fast-consolidating telecoms industry.
Winning the auction for French media company Vivendi's GVT was vital for both Telecom Italia and its rival,Spain's Telefonica, as their European markets have beenshrinking. Italy was gripped by a mobile price war for much oflast year, revenue is falling and competition remains tough.
Telecom Italia lost out to Telefonica as it could not affordto top its 7.45-billion-euro offer for GVT. Telecom Italia hasdebts of 32 billion euros ($42 billion) according to Moody's,and lost its investment-grade credit rating last year.
Buying GVT would have solved Telecom Italia's biggestweakness in Brazil - the fact that its mobile business lacks thebroadband networks of its local rivals.
It may now consider exiting the country, where it makes athird of its revenue, helping it pay some of its debts butleaving it even more reliant on a sluggish domestic market.
Seven bankers and investors interviewed by Reuters on Fridayportrayed Telecom Italia as a company without a clear directionthat would struggle to raise fresh cash from shareholders tofund important network improvements.
Chief Executive Marco Patuano "has a lot of egg on hisface", said one Milan-based senior banker. "He aggressively sold(the GVT deal) as the answer to Telecom Italia's woes and now hehas to go back to the financial community and tell them what'snext."
"There won't be a capital increase simply because it's goingto take some time for the company to recover from the setbackand come up with a new strategy - you can't ask for fresh equitywithout a clear strategic plan."
Adding further confusion is Telecom Italia's changingshareholder base. Telefonica is now its largest indirectshareholder, with a 14.8 percent interest, but will sell part ofthat stake to Vivendi as payment for GVT. Italian financialinstitutions also want out of what has been a money-losinginvestment since 2007.
Vivendi is likely to accept to take from Telefonica some 5.7percent of Telecom Italia shares, or 8.3 percent of votingrights, sources told Reuters. Analysts have speculated Vivendicould later buy out the Italian investors too.
Some said Patuano's predicament made Telecom Italia apotential takeover target for the likes of Deutsche Telekom or Vodafone.
Niall Dineen, a portfolio manager at AGF InternationalAdvisors and a shareholder in Telecom Italia and Telefonica,said Telecom Italia was "no longer a consolidator" but hadbecome a "prey in the industry".
Telecom Italia and Telefonica compete in Brazil as owners ofnumber-two mobile carrier Tim Participacoes andnumber one Vivo respectively.
A banker advising Telecom Italia said the Italians hadexpected Vivendi to favour their GVT offer, despite Telefonicaputting in a higher bid, because of the prospect of contentpartnerships and Vivendi's supposed interest in Italy.
A FUTURE IN BRAZIL?
Patuano's strategy unveiled last year called for assetdisposals in Argentina and elsewhere to help fund networkinvestments in Italy to boost broadband speeds and roll out 4Gmobile technology. He maintained that Telecom Italia's Brazilianbusiness TIM Brasil remained key to the group's future.
Patuano's devotion to Brazil may soon be tested. Grupo Oi,Brazil's largest telecoms company, has signalled it is exploringa bid to split TIM Brasil between itself, Mexico's America Movil and Telefonica.
Telecom Italia said on Wednesday it knew nothing of theapproach for TIM Brasil, which has a market capitalisation of$13.3 billion. After losing GVT on Thursday, the company said itwould stick to its strategic plan to develop Brazil.
However, analysts and bankers said Telecom Italia mightchange its mind.
"Oi's recent announcement ... could represent an exitstrategy for Telecom Italia from Brazil, where it could be paida significant premium for its asset," said Espirito Santo.
Dineen at AGF said: "Its Brazilian business will be gobbledup and it will probably get a good price for it."
It remains to be seen whether Oi, which is heavily indebteditself after buying Portugal Telecom, will be able to pull off abid for TIM Brasil, several bankers said. A joint bid to breakup TIM's assets among the three local carriers could also runinto regulatory opposition, the people said.
A sale would help Telecom Italia to cut debt. Ratings agencyFitch estimated on Friday that selling TIM Brasil could reduceleverage on a net debt to EBITDA basis by 0.2-0.4 times. TelecomItalia's leverage ratio, which was 2.9 times at the end of 2013,is likely to increase this year due to falling profits and weakfree cash flow, Fitch said.
The banker working for Telecom Italia said Patuano "doesn'twant to sell Brazil, but there is no plan B right now".
He laid out three options for the group: sell to a largerEuropean peer such as Deutsche Telekom, pursue a tie-up inBrazil, perhaps launching a capital hike to bid to buy Oi, orpursue a telecom-to-media consolidation plan in Italy via a dealwith Silvio Berlusconi's Mediaset.
He added that he saw Telecom Italia's "best option" was tolook at a deal to partner with Oi in Brazil since it would makesense to merge the biggest fixed-line operator with thenumber-two mobile operator.
Another banker downplayed the chances of a foreign companybuying a more domestic-focused Telecom Italia because the poorstate of the Italian market would act as a "poison pill".
Carlos Winzer, credit analyst at Moody's, saw one silverlining for Telecom Italia in the GVT loss, namely how it wouldpave the way for Telefonica to part ways with Telecom Italia.
The value of Telefonica's shares in Telecom Italia haveplummeted by almost 70 percent since it entered in April 2007. Aconsortium made up of Telefonica and four Italian firms acquireda 23.6 percent stake in Telecom Italia for around 4.1 billioneuros, valuing Telecom Italia's shares at 2.82 euro per share.
The shares closed at 0.88 euro on Friday.
"At least Telecom Italia will truly be independent now fromTelefonica, ending the complicated relationship between the twocompanies," said Winzer. ($1 = 0.7587 Euros) (1 US dollar = 0.7609 euro) (Additional reporting by Nishant Kumar and Anjuli Davies inLondon, Robert Hertz in Madrid; writing by Keith Weir and LeilaAbboud; editing by Tom Pfeiffer)
