By Claudia Cristoferi and Leila Abboud
MILAN/PARIS, July 4 (Reuters) - Telecom Italia SpA has ended contacts with Hutchison Whampoa Ltd on merging their Italian mobile businesses, preferring to focus on a plan to spin off its fixed-line network.
Italy's biggest telecoms player said on Thursday conditions were not in place to start official talks with the Hong Kong-based conglomerate on a tie up with its 3 Italia unit. "At present there are not the elements necessary to start negotiations," it said in a statement.
Yet the breakdown of talks with Hutchison could refocus investor concerns on Telecom Italia's debts of 28.8 billion euros ($37.2 billion) and the weak conditions in its domestic market that have eaten into margins.
Contacts between the Italian operator and the Hong Kong-based group, which is backed by magnate Li Ka Shing, were first disclosed in April. But Telecom Italia in June postponed a decision on the Hutchison linkup, focusing instead on a separate deal to spin off its fixed network into an independent company.
Telecom Italia board member Tarak Ben Ammar said on Thursday talks with Hutchison Whampoa were off. "They are definitely finished," he said after a meeting of the company's board.
Hutchison, whose 3 Italia is the country's smallest mobile player with a 10 percent market share, has been seeking consolidation opportunities to bolster its position in six European markets.
It agreed last week to buy Telefonica's Ireland 02 business for as much as 850 million euros.
The deal would have reduced the number of operators in Italy from four to three, with the aim of blunting a fierce price war that has erupted this year as recession-weary consumers become more price conscious.
But for Hutchison, the failure of the talks means it will have to find another way to fix its Italian business, which spent twice its revenue in the country last year on network investments.
Two people familiar with the matter told Reuters earlier this week that Hutchison and third-placed Wind, controlled by VimpelCom, had held talks over a possible merger.
Such a deal would be simpler from an antitrust point of view than Hutchison linking up with Telecom Italia, but could also stumble over differences in valuation and control, the people said.
Hutchison has a so-called "fair value" of 1.5 billion euros ($1.9 billion) on 3 Italia, but some analysts question that valuation.
"Hutchison's plans must now be on hold in Italy, as Wind is very unlikely to accommodate their inflated sense of their own valuation," said Bernstein analyst Robin Bienenstock.
Telecom Italia shares closed up 1.8 percent at 0.53 euros, while the European telecom index rose 2.2 percent. The stock remains not far from a 16-year low of 0.5050 euros set late last month.