Brazil telecom battle heats up as Oi tries to buy, split TIM

By Luciana Bruno and Leila Abboud

RIO DE JANEIRO/PARIS (Reuters) - Brazil’s Grupo Oi SA unveiled plans on Wednesday to take over Telecom Italia's local mobile unit, in a move sources said was aimed at breaking up the country’s second-biggest wireless carrier and upstaging merger bids by foreign rivals.

Oi said on Wednesday that it hired Brazilian investment bank and shareholder Grupo BTG Pactual SA to explore alternatives to acquire Telecom Italia SpA's 67 percent stake in TIM Participações SA, the country's second biggest wireless carrier.

Oi's plan is to bring in Mexico's America Movil SAB de CV and Spain's Telefonica SA in a deal to split TIM three ways, easing the financial and regulatory burdens of consolidation, according to two sources who asked not to be named due to the sensitivity of the deal.

The move adds a new twist to the bidding war for Vivendi SA's Brazilian broadband unit GVT, which both Telecom Italia and Spain's Telefonica SA are pursuing to bolster their mobile businesses in the country.

Telecom Italia said in a statement that it knew nothing about the move, was not involved in the plans, and saw TIM as a "strategic asset."

Telecom giants are jostling for position in Brazil as they struggle to add customers, invest in high-speed networks and protect profits in a stagnant economy. Those pressures have added to growing expectations of potential mergers, following a trend sweeping markets from Austria to Ireland.

Oi has been sidelined in the consolidation, stuck with a fourth-place wireless carrier and 46 billion reais ($20 billion) in debt after a rocky merger with Portugal Telecom SGPS SA.

To overcome financial and regulatory hurdles, Oi turned to BTG Pactual, a deep-pocketed shareholder that put up 2 billion reais to make sure the Portugal Telecom deal went through, two sources with knowledge of the deal said.

Oi asked BTG Pactual to act as "merchant commissioner", creating a special investment vehicle of the kind that has been used to break up companies among multiple buyers.

The Telecom Italia board, which met for nearly nine hours on the GVT bid on Wednesday, commented on Oi's move afterwards, saying Telecom Italia "is completely extraneous to the Oi SA initiative about which it knows nothing."

A separate statement detailing its offer for GVT is expected on Thursday morning.

Telefonica was also set to meet on Wednesday to discuss its bid. The deals are estimated to be worth 7 billion euros ($9 billion). Vivendi is expected to hold a board meeting on Thursday.

Oi, Telefonica and America Movil, Mexican billionaire Carlos Slim's telecom giant, have been discussing a potential joint bid for TIM since late last year, according to several sources. America Movil owns Brazil's No. 3 wireless carrier and its biggest broadband operator.

"We would expect Telefonica and America Movil to join Oi, as BTG Pactual works as the intermediary and figures out a way for them to buy TIM," said Mauricio Fernandes, an analyst with Bank of America Merrill Lynch.

Breaking up TIM would likely reduce the financial burden for rivals and facilitate regulatory approval, said Antonio Espirito Santo, an analyst with Banco Espirito Santo in Sao Paulo. That scenario would also trigger significant cost savings for Oi, with an acquisition in the region of 35 percent helping save about 12 billion reais, he added.

Any move to consolidate Brazil's mobile market will face close scrutiny from antitrust regulators, who have expressed concern that fewer players will weaken competition.

Capital spending increases and diminishing returns have driven telecom mergers around the world but in Brazil, issues surrounding Oi's merger with Portugal Telecom and the bidding war for GVT have muddied the waters.

Preferred shares of Oi soared more than 5 percent in Sao Paulo, while the price for the company's 5.75 percent bond due in February 2022 dropped 2.5 cents on the U.S. dollar to 94.75 cents - indicating that investors expect Oi to fund any deal with more debt.

BOARD MEETINGS

Oi's move shook up a key day for its European rivals.

Sources told Reuters Telecom Italia's bid for GVT would value the company at roughly 7 billion euros and leave Vivendi with a 15 to 20 percent stake in the Italian group.

Telefonica's board was also set to meet on Wednesday to discuss improving its bid for GVT as it seeks to head off Telecom Italia, according to a person familiar with the matter.

"It will be higher than (Telefonica's original) 6.7 billion euros, but it won't be as much as 8 billion euros," the source said, referring to a figure cited in newspaper reports.

Telefonica declined comment. Vivendi is expected to discuss the GVT offers at a meeting before it publishes second-quarter results on Thursday.

Telecom Italia shares were up 3.2 percent at the end of Wednesday, while Vivendi's were up 1.2 percent. Telefonica was up 0.04 percent.

Telecom Italia executives have said Brazil was core to its strategy but it would examine any bids it received for TIM.

"This places Telecom Italia under even more pressure in Brazil, as the company is apparently mulling the possibility of a counteroffer on GVT and is now faced with a bid on its local subsidiary," Espirito Santo said.

The current mobile pecking order in Brazil has Telefonica with a 28.7 percent market share at the end of the first quarter, Telecom Italia's TIM with 27 percent, America Movil with 25.1 percent and Oi with 18.5 percent.

In broadband, America Movil held 30 percent of the market, Oi 27.7 percent, Telefonica 18.4 percent, and GVT had 12.7 percent. Telecom Italia's lack of a fixed network has left it with less than one percent share.

($1 = 0.759 euro)

(Additional reporting by Brad Haynes and Guillermo Parra-Bernal in Sao Paulo; Stephen Eisenhammer in Rio de Janeiro; Robert Hetz and Elisabeth O'Leary in Madrid; Stephen Jewkes, Stefano Rebaudo and Lisa Jucca in Milan; Editing by David Holmes, Mark Potter and Sonya Hepinstall)