By Agnieszka Flak and Stephen Jewkes
MILAN (Reuters) - Italy is preparing legislation that could lead to a merger of Telecom Italia's network with smaller rival Open Fiber, an issue that is causing friction between the phone group's CEO and some board directors, sources close to the matter said on Sunday.
Open Fiber, owned by state-controlled utility Enel <ENEI.MI> and state lender CDP, has been rolling out a fibre optic network across Italy, in direct competition with Italy's biggest phone group Telecom Italia (TIM) <TLIT.MI>. Industry experts have said such duplication makes little economic sense.
"It is not that far from reality," one of the sources said when asked about the planned legislation to combine the two networks, adding that the government wanted to do it as soon as possible.
The legislation was first reported by newspapers Corriere della Sera and Il Sole 24 Ore.
A second source said the legislation could be an amendment to a draft law approved in September that still needs parliament's blessing. If that bill gets sidetracked, it could be part of another law, the person said.
TIM, whose top shareholder is French media group Vivendi <VIV.VA>, has already begun a process to put its network assets into a separate company, NetCo, fully controlled by TIM.
TIM CEO Amos Genish, a telecoms veteran close to Vivendi, has not ruled out selling a stake in NetCo in future, but wants TIM to retain control.
In June, Genish said he was keen to discuss combining TIM's fiber-to-the-home broadband assets with those of Open Fiber, but not the entire infrastructure.
The network issue took centre stage earlier this year when activist fund Elliott took a stake in TIM to push for a governance overhaul and restructuring, including a spin-off and partial sale of NetCo.
The 5-Star Movement, part of Italy's ruling coalition, has previously said it supported a single network operator under public control.
The plan already has the support of 5-star's coalition partner, the League, plus Economy Minister Giovanni Tria, Il Sole 24 Ore reported.
State lender CDP, which is a shareholder in Open Fiber and TIM, would have a major role in the network company, Il Sole 24 said. CDP already controls regulated gas and power grid companies Snam <SRG.MI> and Terna <TRN.MI>.
Genish became TIM CEO last year and was confirmed again after a board reshuffle in May.
But since Elliott's arrival, he has been caught in the middle of the struggle between Vivendi and the activist fund, which eventually wrestled board control away from the French group at a shareholder meeting in May.
Genish wants to complete a three-year plan launched in March to transform TIM and fix its finances, but he has come under pressure due to tougher competition at home and a large financial outlay to secure airwaves in Italy's fifth-generation mobile auction.
TIM's shares are down nearly 30 percent in the year to date.
Some Elliott-appointed directors are now pushing for Genish's resignation because he is against TIM losing control of its infrastructure, sources familiar with the matter said.
According to a report in Il Messaggero on Sunday, those directors had asked for an extraordinary board meeting this week to seek Genish's removal.
A TIM spokesman said no such board meeting was planned.
"The next board meeting has already been called for Dec. 6 and no call for an extraordinary meeting is planned before that," the TIM spokesman told Reuters.
A Vivendi spokesman said on Sunday the company fully supported Genish and his business plan.
The spokesman also said Elliott was only looking for a "scapegoat" for all its unfulfilled promises at TIM.
Asked whether Vivendi would call a shareholder meeting to push for another board reshuffle, the spokesman said Vivendi would "do anything to protect its interests".
Elliott declined to comment.
(Reporting by Agnieszka Flak and Stephen Jewkes, Editing by Toby Chopra and Jane Merriman)