A consortium led by Telefónica SA (NYSE: TEF) is set to spend €5.15 billion ($7 billion) on a 23.6 percent stake in Telecom Italia (TIM) , with Telefónica's involvement in the consortium giving it an indirect stake of 10 percent in the Italian incumbent. (See Consortium Buys TI Stake.)

The consortium is buying 100 percent of Olimpia, the holding company that owns an 18 percent stake in Telecom Italia, and combining this with the 5.6 percent direct stake in Telecom Italia already held by consortium members. (See Olimpia Sale Agreed.)

The consortium comprises Telefónica (with a 42.3 percent stake), Italian insurance company Generali (28.1 percent), Italian banks Mediobanca and Intesa Sanpaolo (both 10.7 percent), and Italian retailer Benetton (8.2 percent).

Telefónica's share price is up about 0.8 percent, by €0.13 to €16.68, in Madrid while Telecom Italia is down by 0.9 percent, just €0.02, to €2.25.

The news comes only days after AT&T Inc. (NYSE: T) pulled out of talks to invest in Olimpia, leaving its partner, Latin American mobile powerhouse América Móvil S.A. de C.V. , to continue without it. (See AT&T Abandons Italian Bid and AT&T Closes In on Telecom Italia Stake.)

The new consortium, to be "presided over" by Telefónica chairman César Alierta, will be the largest single shareholder in Telecom Italia, which recently reported a 4.5 percent increase in 2006 revenues and outlined its strategy for the next three years. (See Telecom Italia Reports '06 and T Italia Outlines Strategy.)

The consortium will have effective control over the Italian operator's board as it will be able to nominate 80 percent of the board members. With that level of influence, the involvement of multiple local companies will please Italian politicians, who were concerned that overseas owners could soon have a controlling interest in the national operator. (See Eurobites: M&A Hotbed and Telecom Italia: Mama Mia!.)

But Telefónica is clearly the most powerful member of the new consortium, as it will have first refusal on the sale of shares in the new holding company, as well as "veto rights in certain decisions related to share ownership changes, dividend policy and divestitures."

To gain that level of control, Telefónica is investing just over €2.3 billion ($3.14 billion) in the consortium, which will give it a near 10 percent indirect stake in Telecom Italia. That will allow it to place two members on the Telecom Italia board, though Telefónica stresses that the two carriers will be "managed separately and independently," and that the two board members will "abstain from participating and voting in meetings" related to business and markets where both operators "have a presence."

The investment, though, does strengthen existing ties between the two European giants -– they have a working relationship in Germany, where Telecom Italia's HanseNet Telekommunikation GmbH uses Telefónica Deutschland GmbH 's DSL network to provide triple-play services, including IPTV -– and both carriers believe they can generate cost savings by working more closely together. (See Eurobites: Light Me!.)

The analyst team at Dresdner Kleinwort believes the move is "mostly good news" for Telecom Italia, as it gives the carrier a stable ownership situation and a "good industrial partner which could create shared synergies."

But in their research note issued this morning, the analysts cast doubt on the long-term value for Telefónica, as they say there is no guarantee it will get eventual full control of the Italian incumbent. In addition, they note there is also no guarantee of "favorable treatment in Brazil," where the Spanish giant is looking to dominate the wireless market, and where Telecom Italia owns mobile operator TIM Brasil .

But while there is no guarantee, Telefónica's investment in the new consortium at least strengthens its position in Brazil, a key market for the Spanish giant where it already has a significant investment: It holds a 50 percent stake in Brazil's market-leading GSM operator Vivo Participacoes SA , a joint venture with Iberian neighbor Portugal Telecom SGPS SA (NYSE: PT).

The consortium investment benefits Telefónica's Brazilian position in two ways. First, it puts it in a favorable position, if nothing else, should Telecom Italia seek an investment partner in TIM Brasil or even look to sell outright. Secondly, Telefónica's move means one of its key rivals in Brazil does not enjoy the same advantage -- América Móvil's involvement as AT&T's bidding partner was driven by the consolidation opportunities in Latin America.

Now Telefónica is reportedly looking to take total control of VIVO, and admitted late last week to the Spanish stock exchange that it's engaged in ongoing conversations with Portugal Telecom "in relation to the future shareholder structure" of VIVO, but "without any agreement having been signed."

— Ray Le Maistre, International News Editor, Light Reading