By Elvira Pollina

MILAN (Reuters). -Telecom Italia and CDP, the state lender CDP, are likely to begin formal negotiations about a possible merger of TIM’s network assets with Open Fiber’s state-backed Open Fiber. Two sources with knowledge of the matter stated that they were expecting to do so.

Pietro Labriola (TIM boss) presses on with a plan that will revamp Italy’s largest telephone company. It is centered around a seperation of its wholesale operations and its service business.

According to sources, CDP and TIM will likely sign a confidentiality arrangement (NDA), in the first days of April.

CDP and TIM declined to comment.

Although discussions are continuing with KKR about the U.S. funds’ takeover strategy for TIM, TIM’s and CDP’s plans to sign an NDA mark a step forward in an alternative direction.

An insider familiar with U.S. Fund’s thoughts on Wednesday stated that KKR was not optimistic about its prospects. However, it had previously said it wouldn’t pursue the bid without the support of TIM or the Rome government. KKR did not respond to our request for comment.

According to a senior government adviser, Rome remains committed to creating an Italian single-broadband network. This could be accomplished by merging TIM’s assets with Open Fiber which is 60% owned CDP.

CDP holds 10% of TIM. It would also retain control over any combined network, as well as other critical infrastructure.

CDP said that the tie-up will avoid unnecessary duplication of investment required to upgrade Italy’s national network for households and business.

Antitrust problems have made it difficult for TIM-Open Fiber to reach a deal.

PRICE GAP

KKR has submitted an indicative offer to purchase the group, having already made a total of 1.8 billion euro for a 37.5% share in TIM’s last mile fixed-line network.

While KKR didn’t intend for Open Fiber to be merged into TIM, they want to speak with Open Fiber about antitrust concerns and ways it could create value for FiberCop. KKR is an existing investor.

Vivendi, TIM’s largest shareholder (OTC:), has criticized KKR for proposing a low price even though the proposal was offered at 0.505 Euros. Thursday’s trading price for TIM shares was 0.33 euro.

TIM quit the New York-based fund after waiting nearly four months for an answer. In March, he agreed to enter into talks and press on with his standalone reorganisation in order to unlock the group’s “untapped potential”.

Sources claim that TIM demanded KKR clarify Monday whether the offer price of 10.8 million euros was accepted. TIM is at odds with KKR over a due diligence study KKR wishes to conduct before making a formal sale, but TIM says it cannot have a confirmatory nature and would need to be performed prior.

According to a source who was familiar with negotiations, “The problem here goes well beyond disagreements regarding the due diligence. There are little appetites on TIM’s side and Rome’s for KKR’s Takeover Project.”

($1 = 0.9021 euros)