TI Telecom Italia S.P.A. New

Telecom entrepreneur Xavier Niel has become the second French billionaire to buy a significant foothold in Telecom Italia SpA, raising the specter of a takeover battle—or possibly a joint bid -- for the struggling Italian telecommunications company.

Italy's market regulator said Thursday that Mr. Niel, founder and controlling shareholder of French telecom firm Iliad SA, has purchased options to buy an 11.2% stake in Telecom Italia. Most of the options, purchased through a personal investment vehicle, are exercisable beginning next summer, the regulator said.

The move could set up a clash between two heavyweight French investors—or lead them to end up working together. French industrialist Vincent Bolloré has himself amassed a 20% stake in Telecom Italia through media company Vivendi SA, where he is chairman and the largest shareholder.

A person familiar with Mr. Bolloré 's thinking said he wasn't working together with Niel. Mr. Niel declined to comment.

Italy's market regulator is looking into whether there are any links between the two stakeholders, a spokesman said. A person close to Telecom Italia said the company was caught by surprise by Mr. Niel's move.

Telecom Italia, the heavily indebted former Italian monopoly, is a ripe target within Europe's fragmented telecommunications markets. The company's poor performance in recent years has depressed the stock, making it among the cheapest in Europe. But the shares' low value has also drawn the interest of investors looking for a turnaround in the Italian behemoth.

Mr. Bolloré , known as one of France's savviest but most unpredictable businessmen, has been steadily increasing his stake in Telecom Italia in recent months as he looks to put Vivendi's roughly $9 billion war chest accumulated through asset sales to work.

One of France's richest men, Mr. Bolloré has built a reputation as a feared corporate raider. At French advertising group Havas, he started by taking a small stake in 2002, quickly building his shareholding before ousting the chairman and overhauling the company's strategy. More recently, it took him two years to tighten his grip on Vivendi, starting with a 5% stake.

Mr. Niel is known as the enfant terrible of French telecoms because he shook up the country's fixed and later mobile landscape with Iliad, creating a slick new operator that offers service at rock-bottom prices, sparking a fierce price war among the country's telecom firms.

The programmer-turned-billionaire has also become a prolific investor, though mostly in assets valued at less than $1 billion, including a number of startups with which he has had considerable success. An 11% stake in Telecom Italia currently has a market value of about €2.35 billion ($1.59 billion).

But Mr. Niel has also taken bites at bigger fish. Mr. Niel last year agreed to acquire Orange Switzerland—since renamed Salt -- for around €2.3 billion through NJJ Capital, his private holding company.

Iliad last year also made a failed $15 billion tilt at Deutsche Telecom's American unit T-Mobile US, a move that surprised the market. People familiar with the matter have said that Iliad will eventually want to go for another big, transformative deal, partly to put its management team to work on another large-scale project, after barnstorming France's mobile arena since 2012.

An Iliad spokeswoman said: "Iliad and its subsidiaries do not own any shares or rights in Telecom Italia, either directly or indirectly."

Some analysts said it would make sense for Messrs Niel and Bolloré to work together, with Mr. Bolloré bringing expertise in media through his company Vivendi and Mr. Niel bringing much-needed innovation in telecoms.

"Bolloré is an expert in the game of taking stakes and controlling companies. Going against him is tough," wrote Charles Bedouelle, an analyst at Exane BNP Paribas.

Others said it looked like an opportunistic play from Mr. Niel.

"He knows that Telecom Italia is an attractive target from an M&A perspective, that in Europe at some point there might be cross-border activity," Kepler Cheuvreux analyst Javier Borrachero said.

Telecom Italia, has struggled to mount a forceful strategy to deal with the twin challenges of Italy's protracted economic downturn and fierce competition that has sent prices spiraling downward in its domestic market. In the first half, operating profit fell 16%, hit by a decline in both its Italian and Brazilian market.

More recently, Telecom Italia has sought to tackle some of its problems. It launched an initial public offering for its shares in a cell-tower business and spent €2.1 billion in the first half of this year to bolster its ultra-broadband network—slowing its decline in Italy. Nonetheless, analysts still expect its Brazil business to pull revenue down this year.

Manuela Mesco in Milan contributed to this article.

Write to Nick Kostov at Nick.Kostov@wsj.com and Eric Sylvers at eric.sylvers@wsj.com

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(END) Dow Jones Newswires

October 29, 2015 13:55 ET (17:55 GMT)

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