* TIM shareholders to vote on new board on Friday
* Vivendi, Elliott are fighting for board control
* Investors say the two sides need to join forces to fix TIM
By Agnieszka Flak and Pamela Barbaglia
MILAN/LONDON, May 3 (Reuters) - Warring investors will take their battle for boardroom control of Telecom Italia to a shareholder vote on Friday, with both sides promising major changes to reshape Italy's slumbering telecoms heavyweight.
Hedge fund Elliott is leading a campaign to end top shareholder Vivendi's grip over Telecom Italia (TIM), blaming the French media group for TIM's faltering share price and serving its own interests. It is proposing an independent board, asset sales and a return of dividends.
Vivendi accuses Elliott of proposing "quick fixes" and wants investors to back TIM's strategy, unveiled in March, including major investment in digital content, an internal modernisation and a plan to regain its investment grade credit rating.
Both sides want to turn around Italy's biggest phone group, a heavily indebted former state phone monopoly that has underperformed bigger peers such as Deutsche Telekom, and Orange for years.
TIM's enterprise value is nearly 20 percent below that of peers as a multiple of its forward EBITDA, it faces new rivals in both broadband and mobile, and its Brazilian business is only gradually recovering from economic malaise.
"Tomorrow's AGM is a key catalyst in Telecom Italia's equity story (although) the fundamental outlook remains difficult," said UBS analyst Giovanni Montalti, who has a 'neutral' rating on the stock.
Other shareholders say the best outcome would be for Vivendi and Elliott to bury the hatchet and allow a more independent board to push through measures to slash its net debt of more than 25 billion euros ($30 billion), tackle competition and unlock value.
"Whatever slate wins at the AGM, a settlement between the two groups would be the most desirable outcome, agreeing on the key levers to create value for shareholders with a stable board of directors supportive of (CEO Amos) Genish," Morgan Stanley said in a note. The broker has an 'overweight' rating on TIM.
Elliott has built a stake of 9 percent to try change the way Vivendi, which owns 24 percent, is running the company.
New York-headquartered Elliott Management Corp manages assets of about $35 billion and is pushing for change at Telecom Italia through its London-based affiliate Elliott Advisors (UK).
Friday's shareholder vote will pit the two against each other in a bid to secure the majority of TIM's 15-member board.
Whatever the outcome, the two adversaries will have to co-exist with the loser bound to get the remaining five seats.
"This could be the beginning of a new era for TIM," a source close to the company said. "If played well, Genish could have the chance to work in a less hostile environment."
Since becoming a shareholder in 2015, Vivendi has gradually tightened its grip on TIM, appointed the majority of its board last year and named its own CEO as TIM's executive chairman - all in the name of French tycoon Vincent Bollore's stated ambition to build a southern European media powerhouse.
Two TIM CEOs left because of clashes with the French investor.
The hands-on approach has led to friction with politicians in Rome, concerned about an asset they consider strategic, and has unnerved other investors at the telecoms firm.
But Vivendi also brought in Genish, who managed to impress investors and the government in Rome, and whose ambitious new three-year strategy, presented in March, was welcomed.
Last week shareholders nearly unanimously backed the new CEO who, despite being a Vivendi ally, is well respected for his track record in the telecoms industry.
"Genish staying is key to providing stability and execution of the business plan, particularly given the replacement of three top executives in the last three years," Morgan Stanley said.
On Friday, shareholders will have to pick between Elliott's slate of 10 independent Italian business heavyweights and Vivendi's list, which did little to allay governance concerns.
Proxy advisers recommended backing Elliott's slate, saying Vivendi had been damaging for governance and investor returns.
Italian state lender CDP bought 4.8 percent of TIM, a move widely seen as political endorsement of the Elliott campaign.
But Vivendi's trump card is having Genish on its list, which might prove a conundrum for some who may want to weaken the French grip but will not want to lose the CEO.
Genish has said his position would be "untenable" if TIM ended up with a board that did not back his business plan.
Elliott has repeatedly said it supports Genish and his plan.
It also toned down its requests for major strategy moves, saying management and the independent board would evaluate whether and when to carry them out.
The fund had originally called for selling a controlling stake in the soon-to-be-created network company, a return to dividends and the conversion of savings shares -- all measures TIM management called premature, unfeasible and carrying financial risks.
If it loses on Friday, Vivendi has no wish to exit its 4 billion euro ($4.8 billion) TIM investment anytime soon and "the fight will continue", a source close to the matter said.
TIM has often been seen as a pawn in other people's games. Before Vivendi came in, TIM was controlled by a holding company that included Italian investors and Spain's Telefonica.
With Genish in charge, investors hope things could change.
"There is a lot of unrealised value in Telecom Italia and Vivendi and Elliott need to agree on a compromise, maybe brokered by Genish -- otherwise TIM gets bogged down in this boardroom battle and once again nothing gets done," said a fund manager at a U.S. fund that also owns TIM shares. ($1 = 0.8345 euros)
Additional reporting by Mathieu Rosemain; Editing by Elaine Hardcastle