* Stock conversion will dilute investors, including Vivendi
* Conversion to be voted on in December
* Conversion could raise up to 573 mln euros cash (Adds 9-month earnings, paragraphs 10-11)
By Agnieszka Flak
MILAN, Nov 5 (Reuters) - Telecom Italia has decided to go ahead with a conversion of its more than six billion saving shares into ordinary stock to raise cash, in a move which would dilute the grip on the company of its two French investors.
Vincent Bollore's Vivendi has gradually built up a stake of just over 20 percent to become Telecom Italia's top shareholder, while tycoon Xavier Niel bought call options last month that could potentially turn him into its second-largest investor, raising questions about their ambitions for the indebted company.
Vivendi's stake could decrease to just under 14 percent if all saving shares are handed in, unless it buys new shares, Reuters calculations show. Vivendi had no comment.
Italy's biggest phone group said in a statement the conversion will simplify its capital structure, increase the free float of readily tradeable shares, boost liquidity and help pay for planned investments in fixed and mobile networks.
The company said it would give one ordinary share in exchange for each saving share voluntarily tendered, along with a 9.5 euro cents payment in cash. Stock not tendered would be converted under a mandatory scheme at a ratio of 0.87 ordinary shares for each saving share.
If all saving shares are tendered voluntarily, that would raise Telecom Italia around 573 million euros ($623 million) in cash, according to Reuters calculations.
A stock conversion would also save the company from having to pay expensive dividends on the saving shares. It has not paid a dividend on its ordinary stock this year but paid 166 million euros on its savings shares.
Telecom Italia said saving shareholders would not be entitled to a dividend on 2015 earnings, because the conversion is expected to take effect before the payment is due. Ordinary and saving shareholders will vote on the matter at meetings in December.
Sources told Reuters in September that a conversion would only be appealing to Telecom Italia once the price gap between the two share classes reached at least 20 percent. That level was breached on Oct. 23 and has held since then.
Later on Thursday, Telecom Italia reported a 14.8 percent drop in nine-month core earnings after one-off charges, in line with expectations, as improving domestic operations failed to offset a further deterioration in its key Brazilian market.
Adjusted net debt stood at 26.8 billion euros at the end of September, down 188 million euros from three months earlier. ($1 = 0.9194 euro) (Additional reporting by Leila Abboud in Paris; editing by Isla Binnie, David Holmes and Bernard Orr)