Pirelli, Telecom Italia’s largest shareholder, is making progress on a deal to sell a minority stake in the Italian company to Telefónica of Spain.

However, the agreement, which could see Telefónica pay about €1.3bn ($1.72bn) for effective control of 5.5 per cent of TI, is far from sealed, people close to the talks said. TI’s management and board have yet to agree that their industrial strategy would be best served by having Telefónica as a large investor. The Spanish side is also demanding a guarantee that Pirelli, the tyres and real estate group that controls 18 per cent of TI, does not sell any more of its remaining holding to a rival operator.